A return of risk appetite yesterday saw mixed fortunes for the Euro and Pound forex spread betting markets.

The single currency rallied on the back of relief over the success of Irish and Spanish debt auctions, which saw the Irish auction total bids of €5.1bn on an auction of €1.5bn.

The average yield was also slightly lower, while Spain also managed to get all of its €5.5bn worth of debt away.

In another boost to risk US Industrial production for July also helped boost sentiment, surprising to the upside with a rise of 1% against an expectation of 0.5%.

Given how poor recent US data has been this was a rare silver lining amongst a lot of recent clouds, however investors seized upon it as evidence that things weren’t as bad in the struggling US economy as previously thought.

On the flip side Sterling took a hit, dropping back from its recent highs on its trade weighted index as CPI inflation data showed a decline of -0.2% for July.

However, on a year on year basis it remains stubbornly above the 3% level necessitating another letter from the governor of the Bank of England to the Chancellor of the Exchequer.

The biggest concern remains food inflation which is up 3.4% annually, and given recent rises in soft commodity prices, which have yet to filter through the supply chain, is unlikely to come down quickly anytime soon.

Today’s release of the minutes of the August Bank of England meeting is likely to show divergent views on how to deal with the current problems.

Andrew Sentance is likely to be on his own in the hawk camp, favouring a rise in rates. On the other hand the others may veer between holding rates and QE as it is, and the more dovish wanting to recommence QE if the economy continues to show signs of weakness.

EURUSD – the single currency continues to pare back its recent losses breaking back above 1.2900 yesterday as some risk appetite began to return. However while below the larger resistance level above the 1.2950 area at 1.2980 downside pressure should continue to predominate.

The next support level sits around 1.2735/40 which is trend line support from the 1.1880 lows, as well as last week’s lows, and then at 1.2605, 50% retracement of the earlier mentioned move. The bearish engulfing week on the weekly candle charts remains a significant sell signal and while below 1.3000 the potential remains for further losses towards 1.2450 as a precursor to a revisit of the 1.2150 area.

GBPUSD – a failure to sustain a move back above 1.5710 through the 1.5730 resistance saw the Pound retreat yesterday after the weaker CPI data saw the Pound slide back. It has so far managed to hold above the key support levels around the this weeks low’s at 1.5535 as well as the 1.5550 area which was the 50% retracement level of the 1.6880/1.4230 down move, on the way back up.

The bearish engulfing week spread betting candlestick remains the key factor weighing on the Pound but it does continue to hold above the support levels between 1.5510 and the 1.5550 area.

A break and close below the 200 day moving average 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 1.5730 and 1.5820.

EURGBP – a resurgent Euro yesterday saw the single currency break above its previous peaks around the 0.8240 level to trigger losses back towards the larger resistance around 0.8300/10 level.

A test towards the previous lows around the 0.8065/70 level remains the preferred scenario while below the 0.8300/10 resistance.

There should now be interim support around the 0.8230 area and we would need to see a break below that to re-target 0.8170 initially.

USDJPY – not really too much to add from yesterday’s comment as the Dollar continues to tread water between the resistance highs around the 86.25 level and the fairly solid support around the 84.70/80 area as traders remain concerned about whether Japanese officials will sanction steps to stem the Yen’s recent rise.

Only a rally beyond the 87.00 level, the May flash crash lows could prompt an unwinding of Yen long positions. In the absence of any physical intervention, there is a good chance of seeing a re-test towards the 1995 levels just below 80.00.

By Michael Hewson, Market Analyst, CMC Markets.

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