Risk assets saw something of a relief rally during the Asian session and the main question being asked is whether this is being driven by profit taking on short positions or by actual optimism stemming from recent headlines. One of the bigger stories was the mistaken S&P release downgrading the credit rating in France. The later revelation that this was erroneous (and the confirmation that France maintains its AAA credit rating) pushed markets higher, corrected some of the chaos that was seen in bond markets and set the stage for the positive stories seen later.
The next story came out of Greece as Lucas Papademos, the former ECB vice-President was named the next Prime Minister and rumors have started to circulate that Italy will see something similar in the next few days. Comments from the German Chancellor (Merkel) suggested that the Eurozone is expected to remain intact (i.e. no Greek exit) and that stability is the goal, rather than a breakup of the union. Markets did improve after the comments but this issue is unlikely to disappear in the near term, so any new comments could create additional volatility.
Today, the upper house in Italy will vote on its debt budget plans (followed by the lower house vote later this week). The votes are expected to pass so as long as this happens, most of the attention will be directed toward the speeches scheduled by members of the ECB and Federal Reserve. Volatility should quiet down as today is a US holiday and trading is closed.
In the UK, the BoE held its monetary policy meeting and made no changes to the interest rate or its asset purchase program. This was in line with expectations but there were comments describing their purchase ledger, which showed that roughly 220 billion GBP worth of assets were bought before November, so this leaves approximately 55 billion GBP before the program reaches completion. Macro data is relatively light for the remainder of the week, so price activity will continue to be dominated by news headlines, official comments, and order flows.
Technicals:
The GBP/USD is looking heavy as prices approach support at the 1.5880 level (a double bottom). The lack of bounce out of here and the lower high from earlier this week suggest that a break of support is imminent. This is being helped by the negative momentum readings and the break of moving average support. Short term, downside follow-through here should send prices to the daily 38% Fib retracement at 1.5825. Consolidation is expected there before another run lower.
The FTSE is trying to make a bounce out of the 5325 region, which has been tested multiple times. The bounce was strong on the shorter term time frames but the lower highs seen on the 4H charts suggest that additional follow-through is likely to be limited. First resistance comes in at 5490 (just below psychological levels) and this is being viewed as an acceptable sell position for longer term positions.
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