At the end of last week all three of Germany, France and Spain posted better than expected Q2 GDP figures with Germany posting a 2.2% gain, its best performance in 23 years, against an expectation of 1.3%.

Even euro zone GDP came in higher than expected at 1% boosted by the lower single currency, and surging export growth out of Germany.

Given these positive figures it wasn’t sufficient to stop the single currency tumbling back from its recent highs as the US dollar snapped 9 weeks of consecutive declines last week.

It did so in some style, closing at its highest level since the beginning of July against a basket of currencies, posting its biggest weekly gain in nearly 2 years, as a sharp decline in risk appetite saw investors pile out of risky assets on the back of concerns about US economic recovery, and downbeat assessments of the economic outlook by the Federal Reserve, Bank of England and ECB.

Fears about sovereign debt problems within the Euro zone continue to weigh on sentiment with spreads on Spanish and Greek bonds against German bonds widening to their largest levels since June and July, while weak demand at some Italian bond auctions on Friday also weighed.

Elsewhere in the Forex spread betting markets, the pound also had a pretty good week on its trade weighted index despite its declines against the resurgent dollar, closing at its highest levels in 11 months at 82.55, but still seemingly unable to breach this series of highs, with any conviction.

Worries about the recent strength of the yen continues to worry traders, especially in light of today’s latest Japanese GDP figures for Q2 which showed that the recent climb in the yen is having a negative effect on export growth. In contrast to other G7 countries Japan grew only 0.1% in the last quarter, against an expectation of 0.6%, and the figures look unlikely to improve, if the recent climb in the yen continues increasing the pressure on Japanese officials to take steps to stem the rise.

In Europe CPI for July is expected to show that inflationary pressures remain very benign with a figure of -0.4%.

In US data out today Empire manufacturing for August is expected to show a slight increase from July’s low figure of 5.08, with an increase to 8.25.

EURUSD – the single currency posted its first weekly decline in 7 weeks last week and in the process wiped out the gains of the previous three weeks, as the currency went into full reverse, posting a bearish candlestick engulfing week in the process, and closing below its 38.2% retracement of the up move from the lows at 1.1880 to the 1.3335 highs at 1.2775. For spread betting, the next support level lies around 1.2690/00 which is trend line support from the 1.1880 lows, and then at 1.2605, 50% retracement of the earlier mentioned move. We could see rallies back towards 1.2840 and 1.2950 but while below these levels downside pressure predominates.

The bearish engulfing week on the weekly candle charts is a significant sell signal and could well signal further losses towards 1.2450 as a precursor to a revisit of the 1.2150 area.

GBPUSD – like the euro the pound suffered a significant reversal against the dollar last week, though not to the same extent. Nevertheless last weeks weekly close below 1.5710 signifies a significant sell signal on the weekly charts in the form of a bearish engulfing week candlestick. Unlike the euro the pound has just about managed to stay above the confluence of support levels between 1.5510 and the 1.5550 area, after making new lows at 1.5535 this morning.

Firstly there is the rising trend line support around 1.5550/60, from the June lows at 1.4350 which though breached briefly remains intact. Then there is the old 50% Fibonacci retracement level at 1.5550, while below that at 1.5511 there is the 200 day moving average.

A break of all three of these support levels, which looks increasingly likely over the next week or so, would be negative for sterling and open up the risk for further losses towards 1.5320 which would be a 38.2% retracement of the up move from the 1.4230 lows to the recent highs around 1.6000. Expect to find resistance on any rallies towards 1.5680 and 1.5730.

EURGBP – the euro continues to weaken against the pound breaking below 0.8200 and heading towards the previous lows around the 0.8065/70 level.

Expect to find resistance around the 0.8240 level and behind that at the 0.8300/10 level.

USDJPY – the dollar again managed to rebound strongly at the end of last week as traders covered short positions on the back of a number of statements from Japanese officials expressing concern over recent yen gains.

However any rallies continue to struggle anywhere near to, or above the 86.25 area, and behind that at 87.00, the May flash crash lows. Any physical intervention looks unlikely until we get a little nearer the 80.00 area.

There does appear to be some fairly good support around the 84.70/80 area but it would seem a test of the 1995 lows around 79.75 is only a matter of time in the absence of any intervention.

By James Hughes, Market Analyst, CMC Markets.

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