If this week’s intention by central banks was to reassure markets that they are in control of the economic situation with their respective updates on the outlook for growth and inflation, then the recent market reaction would seem to suggest that they have failed miserably.

Fears of a double dip and weak economic data has continued to weigh on investor sentiment over the past 24 hours, not only in the US where US weekly jobless claims again disappointed, coming in at 482k against an expectation of 465k, but in Europe as well as sovereign debt fears start to reassert themselves in the markets psyche.

Greece’s economy shrank much more than expected in Q2 by 1.5%, more than economists had predicted, while unemployment climbed to 12%, while euro zone industrial output declined 0.1% in June, against an expectation of a rise of 0.6%.

This has prompted some fears that euro zone Q2 GDP data due out this morning could be worse than expected.

Expectations are for growth of 0.7%, up from a Q1 figure of 0.2%. German, French and Spanish Q2 GDP figures are also being released this morning with expectations for rises of 1.3%, 0.4% and 0.1% respectively.

In the FX spread betting markets, the pound had a mixed day yesterday failing for the fourth time in the last two months to break above its 11 month resistance highs of 82.55 against a basket of currencies, while reports that the Bank of Japan was checking rates in dollar yen saw the yen weaken from its recent 15 year highs at 84.72 back above 85.00. Japanese policymakers have also been making noises expressing their concern about the rising yen and the effect on the Japanese economy.

US data out today includes advance retail sales data for July where a rise of 0.5% is expected after the decline of 0.5% in June, while CPI data is expected to remain benign with a rise of 0.2% expected in July after the 0.1% decline in June.

EURUSD – the single currency continued its falls yesterday falling below 1.2830/40 before bouncing off support at 1.2775, which is 38.2% retracement of the up move from the lows at 1.1880 to the 1.3335 highs. The subsequent rebound has seen the euro recover to 1.2870 but downside pressure still dominates while below the 1.2950 level.

A break of 1.2775/80 support would open up a move towards 1.2605, 50% retracement on a break of 1.2680 trend line support from the 1.1880 lows.

As explained yesterday the single currency needs to close this week above 1.3050, or we will see a significant sell signal (bearish engulfing week) on the weekly candle charts which would be a precursor to a revisit of the 1.2150 area.

GBPUSD – the pound continues to look heavy against the dollar but so far it has managed to stay clear and above the 1.5520/50 area where a confluence of support levels come into play. This can also be seen in the spread betting charts.

Firstly there is rising trend line support around 1.5540/50, from the June lows at 1.4350. Then there is the old 50% Fibonacci retracement level at 1.5550, while below that at 1.5516 there is the 200 day moving average.

A break of all three of these support levels would be negative for sterling an 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.

Like the Euro, a weekly close below 1.5710 will signify a significant sell signal on the weekly charts or bearish engulfing week.

EURGBP – the euro continues to look weak hitting a low of 0.8205 yesterday before rebounding strongly.

Sentiment in the forex spread betting still remains negative while below 0.8300/10 resistance and while below these recent highs expect to a move towards the lows at 0.8065/70 while resistance should come in around yesterdays highs around the 0.8270 level.

USDJPY – the dollar managed to rebound strongly yesterday on fears of possible intervention as a number of statements from Japanese officials prompted profit-taking on recent yen gains. However any rallies should struggle around 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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