Europe today: pause or reset?

The yen has become stronger to dollar on information that the Bank of Japan has refused priming of economy

The English trend gradually abates. The European Central Bank left the key parameters without changes, there is no turmoil in Mario Draghi's speech, the European statistics is surprisingly stable. Interest of the market shifted to the scheduled meeting of the FRS: strong decisions are not expected, but comments on new risks can be dangerous.

Brexit has been postponed until the next year. Gradually information dust accumulates, and the legal difficulties connected with an exit from the EU become more and more obvious. There are growing chances that Article 50 of the Treaty of Lisbon will not be used even though the UK Prime Minister Theresa May states that «Brexit means Brexit». Marcus J Ball, the founder of the BrexitJustice campaign, has already collected £100 thousand to file a lawsuit against the supporters of an exit from the EU who have lied to the public about benefits of the Brexit for the UK. If the case succeeds, it will cause serious consequences on process of an exit especially as the issue of the role of Scotland in negotiations with the EU exists. Process of an exit has obviously stopped, but in order to force the UK to start the procedure of an exit, the EU considers using Article 7, which allows «freezing» the voting power of the country which does not wish to cooperate any more.

We observe an exceptional case of unanimity in the European data of the business activity - the data were moderately positive, except, certainly, Britain. A problem remains only with the internal demand which is reflected in services field, but it wholly depends on incentives from the regional governments, but not efforts of European Central Bank. Sole indicator of PMI was not enough for GBP/USD dropping to levels below 1.30 - it is worth waiting GDP data as well as mortgage lending data current week. Of course, it will be figures on «old» Britain (prior to the referendum), but if they are worse than was expected, then mitigation of the Bank of England policy at the beginning of August will become inevitable.

Draghi's press conferences was mostly devoted to the issues of the help to the Italian banks, risks of deterioration in a situation in the eurozone. However, Draghi refused to go into details of planned measures. In his opinion, the British referendum has a little impact on euroinflation, and therefore Board of governors did not discuss a possibility of reducing purchasing amounts of assets. Buying up of the assets will be extended, at least till March, 2017, and QE - until inflation does not grow. It has not pleased the market, pressure of sellers was too strong and euro has again dropped below 1.10.

We remind that Central Banks of England, Japan, New Zealand, Australia and Switzerland are going to mitigate policy until the end of summer, and therefore more profitable transactions on euro will be in cross rates, but not in pairs containing the dollar.

The yen has become stronger to dollar on information that the Bank of Japan has refused priming of economy by «helicopter money», but it is worth tracing meeting results on 28-29 July. If the policy of BOJ remains invariable, USD/JPY will continue to fall. If it will reduce further rates and to expand incentives, - it is worth waiting for the growth. If monetary incentives have been postponed until September, the yen would have held a trend on dollar.

Actually, the impact of Brexit on the American rates has turned completely back. At the scheduled meeting the Federal Reserve will try to convince the undeceived markets of increase of a rate this year again. Such «hawk» spirit shall give support to the dollar, the market players will catch hints for terms of the following increase of a rate, and it will be especially interesting to hear of an assessment of the current state of economy. Nevertheless, due to FRS statements the large players are obviously going to buy euro/dollar, and with the corresponding fundamental support will begin to dump these amounts not earlier than from the levels of 1.15-1.20.

From other news it should be noted that:

  1. The IMF has urged the largest economies of the world to expand "urgently" policy of stimulation of growth due to deterioration of the world economy’s state and to prepare contingency plans. High volatility and uncertainty of the financial market were one of the key issues for discussion on July 22 in China at a meeting of heads of the Central Banks of G20. We wait for the main comments on this event current week.
  2. Italy considers the options of the resolution of Monte Paschi problem with attracting of «private sector», though with an «active control» of the the state organizations (namely - Cassa Depositi e Prestiti and Atlante). The plan assumes building-up of assets of the fund of the salvation of Atlante for €2 billion, revaluation of the bad debts in 34% of cost and increase of the income for € 3.5 billion (exclusively for Monte Paschi).
  3. In the USA the season of corporate reporting proceeds, the leading industries remain in a red zone so far. On this background it is worth waiting for continuation of smooth strengthening of the American currency which already presses on the cost of commodities and raw assets.

EUR/USD: The mark 1.1070 keeps relevance. Intraday resistance: (1.1080) (strong)-(1.1114/1.1124) - 1.1158 - (1.1193/1.1213) - (1.1235/1.1320) (protection of market makers). Stable trade higher than 1.1075 gives the chance of the movement to medium-term level (1.1300/1.1320) and further (1.1500/1.1537). Intraday supports: (1.0945/1.0926) (protection of level 1.0900) - (1.0881/1.0870) - (1.8000/1.0790) (level of large options). To a meeting of FRS of strong factors for the movement isn't present.

USD/JPY: Growth at opening of week to 106.6 is already fulfilled. Intraday resistance: (106.96/107.10) (strong) - (108.35/108.51) - (109.20). Intraday supports: (106.00/105.80) (strong) - 105.23 - (104.68/103.54) (a zone of market makers). The movement is constrained up by large options at the level of 108.50. To FRS it is expected flat in the specified ranges.

Author: Lachlan Patel,
ForexChief Currency strategist