The U.K. housing market is looking more and more like following the U.S. with the Halifax Building Society reporting a drop in prices over May of – 2.4% to bring the YoY loss to -3.8%. Coming on the back of the problems in which the Bradford and Bingley find themselves and the growing number of foreclosures, the warning bells are ringing around the Bank of England.

At this point it is just a healthy pullback in what had been a price bubble but given the background of a weaker financial services industry and high inflation the risks are there to be seen.

It is unlikely the BOE will react today by slashing interest rates as other numbers do still confirm there is an element of growth still in the economy as a whole, the OECD just yesterday forecasting this year to return a 1.4% GDP. However, if there are any signs of an acceleration in the contraction then it is also likely the BOE would follow the example of the Fed.

For now Cable is steady but is showing signs of weakening further later today.

The following economic releases are due today:

April
German Factory Orders     (MoM)    +0.4%
German Factory Orders      (YoY)    +6.4%

May
U.S. Initial Jobless Claims (31st)      370K
U.S. Continuing Claims     (24th) 

The ECB & BOE are due to announce their rate decisions

There is little doubt that the rate decisions from the Bank of England and European Central Bank grab the headlines today but is there really any prospect of a surprise to the market?

Not really. The market normally awaits these events but ends up shrugging its shoulders to wait for the next piece of news. The OECD probably summed up the situation by recommending that both banks retain an unchanged policy.

At this point there is little to be gained by hiking rates. However, if they do so there may be more to lose with consumer demand already down the pan and many wondering whether they can meet monthly payments.

By retaining current interest rate levels the intent is to make sure that the economy moderates at a gentle pace with the least disruption and allows for an eventual basing in the economy from which to build the next upswing.

The biggest problem faced in Europe is in the U.K. which is facing its own housing crisis. Not currently bad as the U.S. but definitely at risk. However, while the economy is moderating it is not collapsing and doesn’t have the problems faced by the U.S. The Northern Rock and Bradford & Bingley have been rather unsettling hiccups but have been handled in a way that should ensure the least damage.

So unchanged rates are likely and this should keep the market holding broadly to the range of the past two days and awaiting tomorrow’s non farm payrolls from the States to generate the next larger move.

Note important support and resistance areas:

          USDJPY        EURUSD       USDCHF        GBPUSD
Res:  106.82-00    1.5531-76    1.0585-23    1.9636-65
Res:  105.86-20    1.5460-82    1.0460-89    1.9530-50

Spt:   105.10-30    1.5361-83    1.0390-30    1.9478-98
Spt:   104.20-50    1.5255-83    1.0296-20    1.9390-20

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Coal and gold exports provided Australia with a large decrease in their trade deficit while a 10% drop in capital goods imports also contributed. The drop in capital goods was caused by a large drop in civil aircraft together with machinery and industrial equipment.

The Aussie remained under pressure this morning having backed off from overnight highs at 0.9628 but until the 0.9519 support gives way we still cannot rule out one final high. However, the overwhelming technical evidence suggests a major high is due around this time and by far the greater risk is on the downside.

The following economic releases are due today:

April
German Factory Orders     (MoM)    +0.4%
German Factory Orders      (YoY)    +6.4%

May
U.S. Initial Jobless Claims (31st)      370K
U.S. Continuing Claims     (24th) 

The ECB & BOE are due to announce their rate decisions

The stronger Dollar bullish argument does seem to be following through. Cable broke down below 1.9695 and is edging lower again this morning as is the Euro but at this point I think we still need to be cautious as I’m rather reluctant to call a direct stronger rally right now. Cable really has a messy structure though it’s difficult to argue with the bearishness but the problem I have with it is that even the bearish projections don’t seem bearish enough…

Looking at the Euro there does seem to be a good argument for a short term base around 1.5361 and we can use this as a marker. Hourly momentum is quite bearish while the 4-hour momentum does have potential to form a bullish divergence. However, I am also aware that the Swissie did enough to complete a triangle at yesterday’s 1.0360 level and if that’s the case the next move should be back up to 1.0623 once again. A clean break above 1.0489 Swissie and below the 1.5361 Euro support will provide the confirmation of direct extension. If that is seen then watch out for a test of the 1.5255-83 Euro area while a more distant target is at 1.5082.

Dollar-Yen, in spite of breaking my support is back on its way higher and while I cannot be sure on the short-term wave structure I can only repeat the 106.82-00 target which is crucial in the medium term. Along with this we should be aware of the 161.18-25 support in Euro-Yen.

And to complete the set, the Aussie has been as erratic as could be imagined. It’s still balanced between a larger reversal lower and one final test higher. Below 0.9519 would be pushing the bearish case. The Canada reached my longer target without much of a correction at all. However, I feel now that the 1.0190 area should force a slightly larger pullback before it can complete the move towards the 1.0325 corrective peak.

Note important support and resistance areas:

          USDJPY        EURUSD       USDCHF        GBPUSD
Res:  106.82-00    1.5531-76    1.0585-23    1.9636-65
Res:  105.86-20    1.5460-82    1.0460-89    1.9530-50

Spt:   105.10-30    1.5361-83    1.0390-30    1.9478-98
Spt:   104.20-50    1.5255-83    1.0296-20    1.9390-20

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April                                       Forecast    Actual
Euro-zone Retail Sales   (MoM)    +0.2%    - 0.6%
Euro-zone Retail Sales    (YoY)    - 0.8%    - 2.9%

May
U.K. Services PMI                          50.5       49.8

Releases from the States:
 
May                                             Forecast    Actual
Challenger Job Cuts             (YoY)                103.5K
ADP Employment Change               - 30.0K    +40.0K
Non-Manufacturing ISM Composite      51.0        51.7

Jobs data was mixed while the non-manufacturing ISM was much firmer than expected but still down from April’s 52.0. Overall, while employment numbers are still suffering there are signs from improved corporate profitability along with the Fed surveys that U.S. industry is beginning to cope with the fallout of the past year.

Speaking once again yesterday Fed chairman Bernanke also spoke more positively on corporate conditions but cautioned that rising public expectations for inflation are a “significant concern.”

He also pointed out though that “there's little sign they are driving workers to demand higher wages as occurred in the 1970s and committed himself to “Maintaining confidence in the Fed's commitment to price stability remains a top priority.”

All nice and hearty comments but there are still many risks and the central one now is consumer confidence. In fear of losing their jobs and being able to cope with higher prices provides no contribution to confidence and this needs now be the main drive by the Fed and the U.S. administration.

They are acutely aware of the inflationary threat and this is causing the market to believe there may be room for a rate hike. The OECD cautioned against such a move recommending that the Fed should retain an unchanged policy for another 12 months.

Unless there is any significant increase in domestically driven growth and demand leaving rates unchanged should do little to worsen inflationary pressures which are already providing a drag on spending anyway.

The same can be said for the Euro-zone where the OECD recommended the same strategy but here they extended the period of unchanged rates to 18 months as they see growth continuing to moderate to +1.7% this year and +1.4% next. They also see the U.K. positing a 1.4% GDP next year too but remain more bearish for the European island.

Following Germany’s shock slide in retail sales the numbers for the Euro-zone as a whole also took a tumble and tends to argue in favor of the OECD’s case. While Bernanke pointed out that a 1970’s style wage spiral does not appear to be developing in the States the same may not be true for Europe where the mainland is seeing a boom in industrial protests against rising costs.

Through all this the Dollar really failed to make much headway yesterday possibly feeling a slight concern over news reports of Lehman’s Q2 hedging losses of around $600m and the sharp decline in its stock which is making life difficult for the Wall Street firm to raise fresh capital.

Ahead of today’s ECB rate decision, which is again expected to end with an unchanged policy, the market looks to have taken a day off and awaits Trichet’s post conference musings although he normally provides little new information at these meetings preferring a more consistent transparency throughout the month.

There is little on the release slate either with just U.S. Factory Orders having the potential to shift the Dollar one way or the other. Even then the prospect of tomorrow’s non-farm payroll numbers will probably restrain the market from excessive moves once again.

More later once the daily analysis has been done…

The following releases are due from Asia due today:

Australian April Trade Balance  AUD  -1.70bn

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May                                Forecast   Actual
Italian Services PMI            49.5       48.1
French Services PMI            50.7       50.5
German Services PMI          53.7       53.8
Euro-zone Services PMI       50.6       50.6
Euro-zone Composite PMI    51.1       51.1

No real surprises from the European final Services PMI releases except for the Italian number which fell out of bed down to 48.1. Services have been the area that has suffered across Europe as households slash their monthly budgets.

Later today sees the Euro-zone retail sales which, if they follow the German lead could be quite soft…

The following economic releases are due today:

April
Euro-zone Retail Sales          (MoM)     +0.2%
Euro-zone Retail Sales           (YoY)     - 0.8%

May
U.K. Services PMI                                  50.5
U.K. BRC Shop Price Index
U.S. Challenger Job Cuts        (YoY) 
U.S. ADP Employment Change            - 30.0K
U.S. Non-Manufacturing ISM Composite    51.0

June
Euro-zone OECD Economic Outlook

The central theme for comments today is Bernanke’s comments on the Dollar which on the whole have been interpreted as beneficial for the Dollar. It is interesting to note that matters concerning the Dollar are generally handled by the Treasury which has always stated that a strong Dollar is in the interests of the country.

However, Bernanke having before observed that a lower Dollar is beneficial for U.S. exporters this time also observed that a lower Dollar has negative impact on inflation. This potentially suggests that the Fed is adjusting its position from supporting a weakening economy to one that is beginning to concentrate its attention on inflation and the prospect of interest rate hikes.

It’s probably not a simple function though these days. A higher Dollar has helped oil prices to edge lower to $124pb (but let’s not get too excited – it was at $100bp 2 months ago) so the move lower is very shallow at this stage. Certainly it is not enough to reverse any of the shocks seen so far.

Hiking interest rates may help the Dollar recover but it probably won’t make consumers particularly willing to spend their tax rebate checks and this is where the fragility of the recovery is based.

Higher interest rates will squeeze corporate profits as well and with continuing claims in a steady uptrend the last thing the Fed will want to do is hasten the pace of the growth in the unemployed…

So for now with the ECB and BOE rate decisions tomorrow and the “preliminary” unemployment data through the Challenger and ADP data tonight the market is probably playing a waiting game with the hope that either ECB or Fed makes their decision whether to buy or sell an easier one.

Probably neither will provide the market with that comfort…

Note important support and resistance areas:

          USDJPY        EURUSD       USDCHF        GBPUSD
Res:  105.86-25    1.5627-61    1.0585-23    1.9650-75
Res:  105.28-54    1.5515-40    1.0446-89    1.9595-05

Spt:   104.50-80    1.5361-85    1.0356-86    1.9498-23
Spt:   103.46-86    1.5255-83    1.0296-20    1.9390-20

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Australia recorded a solid Q1 GDP with the YoY figure rising to +3.6% from the prior estimated 2.8%. Indeed, the economy for along while shrugged off the effects of the global credit crisis and continued to benefit from the persistent demand for commodities.

With this result and the strong showing in domestic demand the RBA’s non-farm GDP forecast of 1.75% for the current year seems now to be too low and this could raise speculation that the CB will hike interest rates once again.

Releases from Japan:
                                                         Forecast     Actual
Q1 Capital Spending                  (QoQ)   - 9.8%    - 4.9%
Q1 Capital Spending ex software (QoQ)   - 7.6%    - 5.3%

Equally while Japanese capital spending declined in Q1 it registered a much weaker decline than expected, so much so that there is potential for the Q1 GDP to be revised higher. Never-the-less over Q2 the signs of softening have been undeniable and seen in a squeeze in corporate profitability – a decline of 17.5%.

However, the fact that the decline was less severe than anticipated is suggesting that there is a slowing in the pace of CAPEX decline. Even so Q1 marked the longest stretch of quarterly decline in capital spending since falling for three consecutive quarters between July to September 2002 and January to March 2003.

Releases from the U.K.:
                                                            Forecast   Actual
U.K. May Nationwide Consumer Confidence    67.0      69.0

Meanwhile consumer doom and gloom deepens in the U.K. which saw the Nationwide index weaken even further to 69.0 and marking a new record low for the series since it began in May 2004.

The Nationwide commented, “Confidence in spending also took a big knock, but continued faith in the jobs market suggests that this is being driven by the squeeze on people's incomes from higher prices and weakness in the housing market, rather than fears over job security.”

The following economic releases are due today:

April
Euro-zone Retail Sales         (MoM)      +0.2%
Euro-zone Retail Sales          (YoY)      - 0.8%

May
French Services PMI                               50.7
German Services PMI                             53.7
Euro-zone Services PMI                          50.6
Euro-zone Composite PMI                      51.1
U.K. Services PMI                                  50.5
U.K. BRC Shop Price Index
U.S. Challenger Job Cuts       (YoY) 
U.S. ADP Employment Change            - 30.0K
U.S. Non-Manufacturing ISM Composite   51.0

June
Euro-zone OECD Economic Outlook

While I got my way in the end with a higher Dollar, even to the point of hitting the Euro low on the head, overall the patterns became a lot more complex yesterday and some do need a rethink. At the moment I am still modestly comfortable with what’s happening in the Euro but the Swissie and Pound are becoming pretty erratic.

I have been tentatively making the assumption that the Euro is in a triangle pattern though it is very early in the pattern to actually confirm this. The reasoning was actually linked to the manner in which it declined to 1.0214 followed by the recovery to 1.0526. This also made an argument for a triangle here also but the apparent development of the Swissie version has been far more rapid – almost to the point of completion while the Euro is, as I mentioned, still at the early stages.

I also have to consider the position in Euro-Yen for which I am basically bearish but find the expectation of a near term 106.82 peak in Dollar-Yen inconsistent with more medium term Dollar gains against the Europeans.

Clearly something somewhere needs to give and if there is any more common ground between the currency pairs as a whole it is a bullish Dollar view. Clearly the Pound is under pressure (although the structure is unbelievably complicated,) Dollar Yen has a near term bullish outlook at the very least while completion of a triangle in the Swissie would tend to imply a further attempt higher. Maybe then the Euro could well see more sustainable losses.

The wave development is in most cases fairly advanced in terms that a break could be seen quite soon. Having said that There are some short term resistance levels that would highlight risk of follow-through higher but would, at the same time, cause a short correction that would no doubt take us over the ECB rate decision tomorrow which would then just leave us Friday’s non-farm payrolls to navigate…

Note important support and resistance areas:

          USDJPY        EURUSD       USDCHF        GBPUSD
Res:  106.55-82    1.5627-61    1.0585-23    1.9789-02
Res:  105.54-86    1.5515-40    1.0446-89    1.9675-05

Spt:   104.80-90    1.5361-85    1.0356-86    1.9564-96
Spt:   103.46-86    1.5255-83    1.0296-20    1.9498-23

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Q1                                      Forecast    Actual
Euro-zone GDP (P)   (QoQ)     +0.7%     +0.8%
Euro-zone GDP (P)    (YoY)     +2.2%     +2.2%

April
Euro-zone PPI         (MoM)     +0.8%     +0.8%
Euro-zone PPI          (YoY)     +6.1%     +6.1%

May
U.K. Construction PMI               45.8        43.9

European data provided nothing new to what we already know – inflationary pressures continue to rise and growth was sturdy in Q1 but we know conditions have deteriorated since.

The U.K. provides a different picture with the sharp shortfall against expectations in the construction PMI underlying the precarious situation in the housing market. It hasn’t paralleled the gloom of the U.S. but it’s certainly doing its best to try.

The front page news of Bradford & Bingley has brought that to a head this week with the beleaguered mortgage lender having seen its CEO resign after finding itself in arrears of 3 months on 5% of loans already purchased from Detroit-based GMAC. As a marker that is more than double the average rate for mortgages held by the Bingley.

Releases from the States:
                                          Forecast    Actual
April Factory Orders    (MoM)   - 0.1%     +1.1%

U.S. data continues to provide easier reading with factory orders clearly benefitting and bringing the promise of better times to come.

Although Bernanke noted in his previous speech that the weakness of the Dollar was benefitting export companies he added balance last night by saying that the Fed is “attentive to the implications of the changes in the value of the dollar for inflation and inflation expectations.”

This came along with a more perky expectation of a better H2 saying that the fiscal stimulus will generate “somewhat better economic conditions” and that U.S. interest rates were “well positioned” for an economy facing both price pressures and threats to growth. He cited oil prices as a further factor weighing on growth.

However, he also cautioned that until the U.S. housing market and home prices stabilize, the economy would continue to face the risk of further weakness.

His comments provoked a burst of Dollar buying with the market interpreting that Bernanke was hinting that the Fed’s round of rates cuts had come to an end. Probably so but any thought of an imminent rate hike is premature since the Fed will want to see greater evidence of re-emerging growth before threatening consumer confidence while inflation remains a primary concern.

However, while the market had its brief excitement the question of the Dollar remains one of uncertainty still. Today’s releases are mostly final European services PMI numbers that should confirm the preliminary releases, Euro-zone retail sales and U.S. non-manufacturing ISM which is expected to show signs of weakness.

The fate of the Dollar still hangs in the balance but does still appear to be within a large consolidation following the 1.5283 low in the Euro. Tomorrow’s ECB rate decision will keep market players wary of extending any positions overnight and should therefore indicate another day of range trading but should see the Dollar weaker by the end of the day.

The Pound probably remains the most vulnerable with increasing downward pressure threatening to take it back to the 1.9335-63 lows.

More later once the daily analysis has been done…

The following releases are due from Asia due today:

Australia
Q1 GDP                                    (QoQ)    +0.3%
Q1 GDP                                     (YoY)    +2.8%
May AiG Performance of Service Index  

Japan
Q1 Capital Spending                   (QoQ)   - 9.8%
Q1 Capital Spending ex software  (QoQ)   - 7.6%

U.K.
May Nationwide Consumer Confidence          67.0

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In the only release from Europe so far Swiss CPI shocked to the upside with a 0.8% rise in May which took annual inflation to +2.9%. The rise was driven by housing, energy and transport and extended the period above the SNB’s 2% upper threshold to 5 consecutive months.

The following economic releases are due today:

Q1
Euro-zone GDP (P)    (QoQ)    +0.7%
Euro-zone GDP (P)     (YoY)    +2.2%

April
Euro-zone PPI          (MoM)    +0.8%
Euro-zone PPI           (YoY)    +6.1%
U.S. Factory Orders   (MoM)    - 0.1%

May
U.K. Construction PMI               45.8

The first interest rate decision of the week has passed and in spite of a robust rise in building approvals the RBA announced an unchanged policy which had been expected. The CB commented that the current policy was appropriate for now and expects inflationary pressures to abate with the economy now seeing signs of moderation evidenced by softening retail sales & credit growth data.

They made no hint of the timing of any future cuts which, while inflation remains at elevated levels, is unlikely to happen any time soon. The Aussie pulled back from its earlier gains but only below yesterday’s low will send it much lower.

As for the rest of the day, there is little for the market into which to sink its teeth. However, it’ll watch the combination of the provisional Q1 GDP from the Euro-zone along with PPI to vainly hope that the ECB may tighten its already hawkish stance. With some concern over the lowering of U.S. investment banks’ credit ratings there is potential for a lower Dollar.

However, two days before the ECB decision there is little appetite for aggressive moves and this should keep things subdued over the day.

Note important support and resistance areas:

          USDJPY        EURUSD       USDCHF        GBPUSD
Res:  105.50-86    1.5644-88    1.0425-49    1.9773-11
Res:  104.65-89    1.5588-15    1.0386-05    1.9677-95

Spt:   103.62-84    1.5460-85    1.0253-88    1.9566-96
Spt:   102.72-02    1.5385-09    1.0200-14    1.9478-98

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In spite of a robust rise in building approvals the RBA announced an unchanged policy which had been expected. The CB commented that the current policy was appropriate for now and expects inflationary pressures to abate with the economy now seeing signs of moderation evidenced by softening retail sales & credit growth data.

They made no hint of the timing of any future cuts which, while inflation remains at elevated levels, is unlikely to happen any time soon.

Releases from Japan:
                                          Forecast    Actual
May Monetary Base      (YoY)  - 0.8%    - 0.9%

Very clearly the BOJ are maintaining the steady decline in the monetary base in line with their preference to prepare for normalization of interest rate levels. However, any interest rate hike is extremely unlikely at present until there are stronger signs of a recovery in the global economy. Given that is unlikely any time soon we can be pretty certain that the status quo will remain unchanged for the foreseeable future.

The following economic releases are due today:

Q1
Euro-zone GDP (P)    (QoQ)    +0.7%
Euro-zone GDP (P)     (YoY)    +2.2%

April
Euro-zone PPI          (MoM)    +0.8%
Euro-zone PPI           (YoY)    +6.1%
U.S. Factory Orders   (MoM)    - 0.1%

May
Swiss CPI                 (MoM)    +0.4%
Swiss CPI                  (YoY)    +2.4%
U.K. Construction PMI                45.8

There was a little more movement than expected yesterday and in some pairs price is really pushing the limits of some structures which means we really need keep and eye on these. The most obvious of these were in Dollar-Yen and Cable.

My preference for Euro-Yen to take a dive came through well and it took losses in Dollar-Yen to create that move. Overall, the decline in the latter is pushing the credibility of the 106.82 target but has not yet broken down the structure. Euro-Yen reached a decent support at 162.13 but this doesn’t look like being the end. However, in this case I suspect the Euro is due another attempt lower and it should be this that pushes Euro-Yen lower today. It should also prevent Dollar-Yen from gaining too far today and we’ll have to see how this develops. For a bullish move it really needs to move back above 105.25-50.

As for the Euro itself, while just a little messy it has so far failed to break back above the 1.5588-1.5614 resistance and I still feel this should continue to be the case to provide the avenue for losses down to the 1.5409 area and it is from here we are likely to see a recovery – else look for a move all the way back to 1.5283.

Now, the other pair that is pushing limits is Cable. That drop to 1.9596 is the most with which I can feel comfortable within a bullish scenario. It’ll need a break back above 1.9723 and then 1.9772 to provide ammunition for a push above the 1.9849 high. Until then there does seem to be an inherent risk of stronger losses – next major support is around 1.9498.

However, overall, even taking in the Swissie I feel this should be a Dollar positive day but once we achieve targets the rest of the week could well turn soft again within a rather messy and erratic style of development that is normally the risk in larger sideways trading ranges.

Note important support and resistance areas:

          USDJPY        EURUSD       USDCHF        GBPUSD
Res:  105.50-86    1.5644-88    1.0425-49    1.9773-11
Res:  104.65-89    1.5588-15    1.0386-05    1.9677-95

Spt:   103.62-84    1.5460-85    1.0324-50    1.9566-96
Spt:   102.72-02    1.5385-09    1.0253-88    1.9478-98

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