EURUSD, EURCHF – Irish junk

The level of uncertainty probably hasn’t been that high this year with markets switching from panic over Italy to a mini-rally and back to doubts after Moody’s decision on Ireland. Moody’s downgraded Ireland to junk on worries that Ireland might not be able to return on the market after it uses the aid package and involvement of private creditors will be necessary. The agency continues to add pressure on politicians in Europe and the IMF to offer a long-term solution now rather than in September and unless they do the nervousness is bound to return (especially as Italy is under review and can be downgraded anytime).

Technically the EURUSD remains within the long-term upward channel thanks to the relief rally yesterday. However, the picture remains bearish until the pair returns above the lower limit of the broken triangle.

Equity markets – stronger Chinese data, weaker from US

The Chinese GDP rose by 9,5% yoy in the second quarter – slightly stronger than expected (9,4%) as the output rose in June 15,1% - two percentage points above expectations. While the growth is still firm it must be noticed that it came at the cost of rising inflation – the CPI hit 6,4% in June – and therefore is not sustainable.

Meanwhile the trade data in US indicated that the Q2 growth will be disappointing again. The deficit widened to 50,2 bln USD – a three years high on rising imports and declining exports. The deficit in a trade of petroleum products alone exceeded 30 bln USD providing another hint of how high oil prices hit the growth.

The markets are focused on twists and turns in Europe but even if those fears abate concerns over global recovery will return, especially as oil prices remain elevated.

Gold – market dreaming about the QE3

One of the reasons the market took Irish downgrade so lightly was a ray of hope for the additional monetary stimulus offered in the minutes from the Fed’s meeting in June. The minutes revealed that some members of the Fed still saw QE3 as an option should the growth remain weak and the discussion took place before the release of the payrolls report for June. However, there are also members suggesting that a sooner-than-expected tightening might be necessary. We think that QE3 is possible only in case of a real threat of recession and we are not at that point yet.

Renewed debt concerns in Europe plus a resurging talk about monetary expansion in US provided fuel for gold prices which ended a 2-month consolidation. Gold remains in the long-term upward channel and the price may be aiming at resistances at 1615 and 1685 USD per ounce.

Events to watch – Bernanke in Congress, UK labor market, US fuel inventories

If not the worries over Italy, semiannual testimonies from Bernanke in the Congress would be the key events for of the week. Investors are wondering if the Chairman starts speculation about the QE3 following two months of stagnant labor market. Should he do, consequences could be far reaching with equities and commodities surging and dollar losing value. The testimony begins at 10.00 ET (16.00 CET).

On top of that we have the labor market data from UK (4.30 ET, 10.30 CET, consensus +15k) and the data on US fuel inventories (10.30 ET, 16.30 CET).      

Przemysław Kwiecień PhD, Chief Economist

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