Equity markets headed lower overnight and the US Dollar recovered some of this week’s losses as news outlets focus on the numerous speeches made by Federal Reserve members. Their comments were generally dovish and lacked optimism for the US economic outlook but there was no clear consensus in terms of future FOMC policy moves.
The President of the Cleveland Fed (Pianalto) predicted that inflation will drop below 2% in the first half of this year and remain at that level for most of 2012. The President of the San Francisco (Williams) argued for additional economic stimulus in the form of official bond purchases if deflationary conditions take hold and he also suggested that the US unemployment rate needs to drop to the low 5 percent area before we can say the US economy is recovering. The current unemployment rate is still far from reaching this target, so this is leading some analysts to suggest that the Fed could still make policy more accommodative.
A statement from Fitch was also released on Tuesday, confirming the AAA credit rating in Austria (after some previous speculation that there would be a downgrade) and said that there are currently no plans to downgrade the rating France for the remainder of the year. The release wasn’t totally positive, however, as private banks were described as liabilities and potential risks going forward. Credit ratings in Italy, Cyprus and Ireland are still under review from the agency, so expect any news related to these credit assessments to weigh on the Euro.
In Greece, official reports showed that private banks in the country have borrowed a total of 116.5 billion Euros from the European Central Bank (prior to December), which is a record high and an increase of nearly 6 billion Euros from the previous month. This rise in borrowing is particularly discouraging, as it suggests an unchanging dependence on the ECB and a decrease in total levels of loan collateral.
On Thursday, we will see the next scheduled ECB meeting and at the moment, markets are expecting an interest rate reduction of 25 basis points. Friday will see the next bond auction in Italy and today, markets will be watching the GDP figures out of Germany. Most of the data today is centering on the Eurozone, so expect the volatility in the EUR/USD to remain elevated.
The EUR/USD is rolling over after hitting resistance in the 1.2790 region. The latest move is turning the short term indicator readings back to bearish and the focus is now back on support at 1.2740. This comes in just ahead of the 61.8% Fibonacci support level so there should be some difficulty here and potential consolidation before another spike lower. A break and hourly close below here targets a full retracement from the latest rally on the short term charts.
The DAX remains at elevated short term levels, with prices now facing historical and moving average resistance at 6175. We are seeing some stalling here but the higher lows and the lack of any material failure here puts the odds in the bull camp. A break here will be a very positive signal and target 6440 first before making a run into the upper 6000s.