In the absence of any economic data out of the US, Europe or the UK today markets will head into the weekend with the nasty after taste of yesterday’s awful data still resonating like a bad hangover.

Risk appetite took a hammering in yesterday’s afternoon session after US weekly jobless claims climbed to a nine month high of 500k, 24k above expectations as the economic recovery in the US took another body blow.

If that wasn’t bad enough the Philadelphia Manufacturing Business survey for August dived 7.7% against an expectation of a rise of 5.1%.

This double whammy of deteriorating US data has dealt a significant body blow to investor sentiment, and reinforced fears about a double-dip recession. It has also given investors a bit of a dilemma with respect to the Dollar, as to whether to sell it due to the shockingly bad data, or buy it, for its safe haven qualities.

To get around this problem investors have been diversifying into the Yen, Swiss Franc and gold spread betting markets, with all three gaining significant ground.

The Pound has benefited to some extent as well after surprisingly good July retail sales data, and better than expected public finance numbers yesterday morning as it continues to hold its own, close to 11 month highs against a basket of currencies.

The Euro continues to be buffeted by sovereign debt fears with Greece due to receive its next tranche of aid shortly, but beset with concerns about the damage the current austerity program is doing to the Greek economy. On other hand, the German Bundesbank revised up the growth forecast for the German economy by 1.1% for 2010 to 3%.

EURUSD – another day and another peak around 1.2900 and another failure to break above it. The prevailing range between 1.2750 and the resistance levels around 1.2950 continues to be the way of things for now, but while below 1.2980 downside pressures should continue to predominate.

Trend line support from the 1.1880 lows at the 1.2750/60 area is the first line of support for the moment, while just below that last week’s lows at 1.2735/40 should also bring additional buying interest.

The bigger level remains 1.2605, the 50% retracement of the 1.1880/1.3335 up move, which remains the longer term objective.

Without over labouring the point, the importance of the bearish engulfing candle last week on the weekly 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 – the Pound tried and failed yet again to break below the 200 day moving average at 1.5490 yesterday helped in no small part by the better UK economic data.

Another sharp rebound ensued stopping just shy of the 1.5700 area again at 1.5670. This failure to regain the 1.5700 area and break through the 1.5730 resistance continues to weigh on Sterling, as do the lower highs of the past 3 days.

Last weeks bearish engulfing candlestick remains the key factor weighing on the Pound, and 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.

This 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 brief dip below 0.8200 yesterday was followed by a sharp rally back towards 0.8245. However, while below the larger resistance around the 0.8300/10 level, the momentum favours a move lower to re-target the 0.8170 area initially.

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

USDJPY – talk yesterday that the Bank of Japan may further ease monetary policy weakened the Yen slightly initially; however the poor US data sent the Dollar spinning lower towards its 15 year lows briefly dipping below 85.00 towards the fairly solid support down around the 84.70/80 level.

There still appears to be a reluctance to push the Dollar aggressively lower for fear of some sort of intervention, verbal or otherwise.

Only a rally beyond the 87.00 level, the May flash crash lows could prompt an unwinding of Yen long positions. The broad range between 84.70/80 and 86.25 appears to be the way of it for now and any move towards 80.00 could well be long and drawn out.

By Michael Hewson, Market Analyst, CMC Markets.

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