UK in focus ahead of Bank of England minutes.
By Michael Hewson (Senior Market Analyst at CMC Markets UK)

Concerns about Europe appear to be background noise at the moment, everyone knows it’s there, its just people’s attention is elsewhere for now, with the focus on Libor on both sides of the Atlantic as well as a whole host of economic data out of the UK, and Bernanke testifying in the US for markets to focus on.

Not to worry though Europe remains on the radar, with Germany set to sell €5bn of 2 year paper, with yields like to reach record lows, while Portugal looks to sell 6 month and 1 year T-bills.
The German parliament is also set to begin debating the Spanish bank bailout

Yesterday’s sharp fall back in the UK June CPI numbers appears to vindicate the doves on the monetary policy committee who voted for the resumption of an extra £50bn worth of asset purchases at the most recent meeting of the Bank of England. Given that in May the Governor was outvoted 5-4 on additional QE, today’s publication of the latest meeting minutes will give an additional insight as to how unanimous the decision was to restart the program. The extent of the fall in inflation is also likely to increase speculation about further asset purchases further down the line in the event this latest slug of monetary stimulus also fails to fire up economic activity. Also due out at the same time the latest unemployment numbers are also due out with June jobless claims set to rise by 5.1k, down slightly from the May figure of 8.1k. The three month ILO unemployment rate up until May is expected to remain unchanged at 8.2%, while three month average earnings are expected to stay at 1.4%, still well below the rate of inflation.

After seeing hopes of imminent signals about additional QE dashed by Fed Chairman Bernanke yesterday afternoon equity markets managed to pull back some ground on a number of fairly upbeat earnings reports. The problem the Federal Reserve has is that the economic data while not great isn’t awful either so it will probably need another couple of months of below average jobs data, and economic activity before the Fed can even contemplate further action. This suggests we will continue to get the on-going dance in the markets of the “will they, won’t they ease” all the way to the Jackson Hole symposium in late August, given that yesterday’s comments suggest that the FOMC meeting at the end of this month is likely to signal no change.
Attention is also likely to switch to today’s follow up testimony by the Fed Chairman as well as the latest building permits and housing data for June. Expectations are for a rebound in housing starts of 5.2% reversing the 4.8% decline seen in May. Building permits are expected to slip 2.4% after seeing a strong rise of 7.9% in May. Later in the day the latest assessment of regional economic activity will be published with the release of the latest “beigebook” of economic conditions in the various Fed districts and sectors.
            
EURUSD – no change in view here with the single currency currently finding difficulty staying above the 1.2300 level and previous reaction lows from June. Yesterday’s dip below 1.2200 was rather brief suggesting that nervous shorts could be building up.
In any case the price action still points to a move towards 1.1880 and the 2010 lows, but we do run the risk of a bigger short squeeze on a break back through 1.2300, which could see a move towards 1.2370. A daily close back inside the triangle breakout retargets the highs two weeks ago and 55 day MA at 1.2590, while behind that the 50% retracement level of the 1.3285/1.2290 down move at 1.2790.

GBPUSD – yesterday’s slide lower in the cable to 1.5550 proved to be ever so fleeting suggesting a certain nervousness about aggressive short positions. The long shadows on the daily candles seem to suggest we could see a move towards the 200 day MA at 1.5753, though we can expect to find some selling pressure around the July highs at 1.5720 and the 1.5700 area where we have the 55 day MA.
Pullbacks can expect to find some support at the 1.5520 area as well as 1.5460 and last week’s lows at 1.5395.
Only a move below 1.5250 signals a risk of a return to the July 2010 lows at 1.4950.

EURGBP – two successive daily lows at 0.7830 suggest a pause in the downtrend but certainly don’t negate the possibility of the move to the 0.7784 level, which is 61.8% retracement of the entire up move from 0.6535 and 2007 lows to the 2008 highs at 0.9805. The downside does now appear to be getting a little stretched which suggests we could be at risk of a pullback.
While below the 0.8000 level, downside pressure predominates, though we also have resistance around the 0.7920 area.
The major resistance remains around the 55 day MA at 0.8025 and trend line resistance from the highs this year at 0.8505 at 0.8040. USDJPY – the break below the 200 day MA at 79.05 hasn’t really followed through on the downside keeping the next move evenly balanced. The risk remains for further losses towards the 78.20 level initially, as well as the May lows at 77.60.
Given the lack of reaction it is probably preferable to play down the importance of the average at this stage and focus on the resistance at the high this week at 79.30.
The main resistance remains at the top of the weekly cloud at 80.45.

Equity market calls
FTSE100 is expected to open 13 points higher at 5,642
DAX is expected to open 24 points higher at 6,602
CAC40 is expected to open 17 points higher at 3,194
FTSEMib is expected to open 58 points higher at 13,594

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