Three painful points: Europe, Japan and the US

The upcoming meeting of the European Central Bank current week is not expected to lead to a serious mitigation of policy

The market has been tired to wait for good news, the first wave of turmoil concerning exit of Britain from a zone of the European control gradually abates. Factors, similar to tragic events in Nice, are worked off quickly enough. Therefore, the growing stock indexes remain the main factor for the currency exchange markets.

According to the new British Prime Minister Theresa May, the official request for an exit from the European Union shall be sent not earlier than by the end of the current year. So far only one point in the consultations with the EU, namely the withdrawal from the free movement of labour power, has been seriously discussed. It means that there will be no Norwegian option of the relationship and the access of the UK to the European market of financial services after all will be limited.

The reaction of pound quotations is an obvious example of unjustified expectations: the analysts predicted a decrease in rates and the investors have believed them. When the Bank of England has decided not to change the policy, GBP/USD has flown up on settling the political situation with the Prime Minister, and also preserving amount of QE at the level of £375 billion. The position of the BoE is clear: a fall of pound stimulates the inflation growth, a decrease in rates along with the start of the QE program can lead to extremely negative situation. Also Carney has reported that the decisions made at meetings in July-August should be considered as the single pack of measures. The decision in August will depend on the quarterly inflation statement and the forecasts. Most likely, the emphasis will be put on the purchase of corporate bonds, the LTRO auctions, i.e. on crediting of economy. The statistics to be released on the current week will help to determine the direction.

The Prime Minister of Japan Abe has received the majority following the results of elections to higher chamber of the Parliament, having extended the mandate for increase in consumer prices and economic growth. He has already confirmed that he has given instructions to the Government to prepare a new packet of stimulation. Last week (in the run-up to a meeting of the Central Bank of Japan on July 29) the closed meeting of the government and the head of the Central Bank of Japan with Ben Bernanke took place. Naturally, there are no official data, but it is obvious that the possibility of launching the strategy of the «helicopter money» was discussed, whereby the government issues the short-term bonds and BoJ issues as the security the money to the population in the form of decrease in taxes, increase in state expenses or other subsidies subsequently. Now it is rather difficult to expand the program of the Japanese QE regarding purchases of the government securities, but the government needs to devaluate yen at any cost and the forthcoming decisions are simply obliged to swing USD/JPY up.

The upcoming meeting of the European Central Bank current week is not expected to lead to a serious mitigation of policy, but Mario Draghi's press conference can hint at additional measures which will help to cope with economic consequences of the decision of the UK to leave the European Union. A release of statistics of PMI of the eurozone is planned after a meeting of European Central Bank that can compensate the possible growth of euro after a press conference.

On Friday the pressure of the sellers upon dollar has a little weakened and the American currency could win back a part of its positions. The statistics has supported dollar, speculation on increase of a rate will remain unchanged this year, inflation and the labor market are confirming that. If the economy really accelerates, and risks from Brexit will decrease, then the bondholders who have bought up large amounts during turmoil will get into extreme difficulties. The next report of the Beige book shows that the economy of the US is in weaker condition, than was planned, and even though the tie is not enough, nothing prevent FRS to raise the interests in the current year. It is worth tracing data on the real estate market in the US current week (on Tuesday and Thursday).

From the other information it is necessary to outline the following:

  1. Before the upcoming meeting of the Ministers of Finance and the Central Banks’ officers of the G20 countries in China, the OECD detailed report has been published, key figure of which is the GDP growth rate in the I quarter - 0.7% (only Brazil has pointed out a decrease). According to the forecast of the WTO, the growth of the world trade shall constitute 2,8% this year that is close to an indicator of 2015.
  2. The American banks have received from the FRS the next postponement for a year for applying of Volcker rule which imposes a prohibition on investments into private stock capital and hedge funds. The bank institutions need to get rid of multi-billion investments in the short-term perspective with the minimum losses. For example, such monsters as Goldman Sachs and Morgan Stanley need «to dump» $7.2 billion and $3.4 billion respectively.
  3. The hearing that the Reserve bank of the New Zealand prepares for the interest rate reduction has received one more confirmation. Before the publication of the quarterly report, the statement for representation of a new (unplanned) economic evaluation has been announced. Those who trade Asian assets should take it into account.
  4. In spite of the fact that on Monday on the Tokyo stock exchange output, during Asian trading session the majority of share indexes of the Pacific Rim increase after a revolution failure in Turkey, in leaders of growth - papers of the finance and energy companies, and also crude oil. This week it is worth paying attention to data on stocks (on Tuesday and Wednesday) which can specify prospects of the movement of raw currencies.

EUR/USD: The main direction remains the same: steady trade higher than 1.1069 raises a possibility of the movement to strong medium-term resistance (1.1303-1.1320) and in case of his breakdown level 1.1400 will become again actual. Intraday resistance: (1.1120-1.1128) - 1.1140 - (1.1165-1.1170) (strong) - (1.1190-1.1195) (strong) - (1.1255-1.1260). Intraday supports: (1.1020-1.1000) - (1.0980-1.0970) - 1.0900 - 1.0867. Purpose up area of protection (1.1350-1.1450). Purpose down - 1.0860.

GBP/USD: So far there is a fight at the important price (from the point of view of risks) - 1.3262. In case of breakdown the important area (1.3300-1.3310), further the range (1.3430-1.3460) which protects level 1.3500 will become the first purpose. Higher than the level 1.3500 the following purpose - 1.3788. Strong and basic support: (1.3245 - 1.3235). Her breakdown is dangerous by the movement to 1.2955 and 1.2771.

Author: Alexander Ward,
ForexChief Currency strategist