Chinese Cut in Reserve Ratio Requirements Fails to Inspire Markets; GBP/USD Seen Grinding through 1.6050

One of the bigger headlines over the weekend was the decision in China to reduce the Reserve Ratio Requirements (RRR) for commercial banks. This is done as a move to stimulate lending and encourage consumer sales but the markets largely ignored this development, as equity markets and high yielding currencies continue to trade at last week’s lows. This can be seen in the Australian Dollar, in particular, which dropped below parity against the US Dollar for the first time this year. Growth forecasts in China continue to be revised lower, and this is seen weighing on Australia’s export market, and the result is a lower AUD/USD.

Continued political obstacles in Greece are not helping matters and we are now seeing comments from pundits which suggest that a re-election in Greece could be the only this that will bring a calming factor to the currently negative risk sentiment. There was one bright point on Friday, however, as the employment data released out of Canada did beat market expectations, showing a job increase for April at 58,200 jobs, which was much higher than the 10,000 consensus estimate.

Full time jobs were a key factor, and rose by nearly 44,000 for the month and this is being viewed as impressive on a trend basis, as last month’s numbers were also very strong at 82,300. The unemployment rate, however, did rise, and is now seen at 7.3 percent from 7.2 percent previously. This increase in the unemployment rate came as a result of more workers entering into the labor force. The next question for Canada will be the response from the country’s central bank, which has been relatively hawkish this year, though most analysts are still expecting no change in interest rates any time soon.

Price activity in the commodity bloc will continue to be guided heavily by growth prospects in China, where slowing momentum is now being forecasted. Second quarter GDP is now expected to come in at a rise of 8 percent (from 8.4 percent previously). Yearly GDP growth for 2012 is now expected to come in at 8.2 percent (from 8.5 percent previously). Any significant changes from these expectations will see the most marked effects on currency markets first, and the commodity currencies will likely see some heavy selling against the US Dollar if China fails to match these analyst expectations.

Technical Analysis:

The GBP/USD is starting to roll over after posting an impressive rally this year. Prices are currently dealing with resistance turned support at 1.6050, and a break here should accelerate losses into the confluence of Fibonacci and moving average support at 1.59. Looking at the indicators, we can see that there is plenty of room to extend to the downside if prices do convincingly break 1.6050, so wait for a break and hourly close, and then look to sell any rallies.

The S&P 500 is trading at the lower end of its shorter term range, which is also aligning nicely with the 23.6% Fibonacci retracement of the move from 1060. A break here will signal that a medium term top is in place and put the focus back onto the 38.2% Fibonacci level now seen at 1285. There could be some slowing at current levels, however, given the proximity to longer term moving averages.

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