Equity markets and high yielding currencies remained under pressure overnight despite the fact that no new negative headlines out of the Eurozone were seen. Most of the volatility occurred in the currency markets, with the Euro, Pound and Aussie amongst the biggest losers on the day. Looking at the crosses, the EUR/GBP had one of the most surprising moves and the latest inflation report from the Bank of England (BoE) and recent commentary form Governor King are showing a dovish bias and helping to reverse a longer term downtrend in the lesser traded EUR/GBP cross.
As of now, the BoE expects consumer inflation in the UK to remain under its 2 percent target on a 2-3 year time horizon, and this is leading many analysts to suggest that we could easily see another round of quantitative easing stimulus if pricing pressures fail to return to normal during that period. The major risk is still seen in Europe, and any further evidence of debt contagion or limitations in bank liquidity will likely be the factors that turn these forecasts into a reality. Any additional need for stimulus will be bullish for UK equity markets (FTSE 100) and heavily bearish for the currency. (GBP).
The other main story from yesterday came from reports that the European Central Bank (ECB) will reduce its loans offered to Greek banks and that this will continue until recapitalization procedures are finalized. Part of the report suggested that four private banks in Greece are conducting business despite having negative equity capital, and if this is actually the case, those banks will likely be forced to request Emergency Liquidity Assistance from the Bank of Greece. There has been confirmation that there are private banks in Greece that has already asked for this assistance, so the main question going forward will be the length of time it will take for these banks to finalize their recapitalization procedures, which would then allow them to again receive loan funding from the ECB.
For shorter term traders, the key issue here should be very clear: bank liquidity. If markets start to show concern for credit squeezes and dried up bank liquidity, price activity is likely to become very volatile, very quickly. We have already seen this to a reduced extent in the last two weeks, with the US Dollar posting 13 consecutive sessions of gains (the longest positive run ever) and this is only going to continue unless markets are presented with some evidence that Greek banks have recapitalized.
Ahead today, remain watchful for the jobless claims data out of the US, as this will give markets an indication of whether or not the longer term downtrend is showing true signs of recovery.
The USD/JPY is attempting to break out of its shorter term down trend channel, ahead of key moving average and Fibonacci support in the 79.20 region. This area should be viewed as a good entry level for longer term buy positions, as prices base and head back toward resistance above 84.
The FTSE 100 is showing a forceful move downward on the short term time frames and the next level to watch is seen at the longer term uptrend line now in the 5250 region. A break and weekly close here would be very ominous, and turn the yearly bias back to the downside.