Forex Markets to Trade with Risk Appetite, Goldman and J&J Earnings in Focus (Euro Open)

Forex markets are likely to look past the data docket to follow risk trends in European hours, with second-quarter earnings reports from Goldman Sachs and Johnson & Johnson likely to prove particularly market-moving. The UK Consumer Price Index and German ZEW Survey of investor confidence are also on tap.

Key Overnight Developments

• UK Housing Market Seeing ‘Wholesale Shift in Sentiment’, Says RICS
• Australian Business Confidence Positive for the First in 18 Months

Critical Levels



The Euro kept near familiar levels in the overnight session, oscillating within 40 pips below the 1.40 level. The British Pound tested as high as 1.6293 but reversed course to yield a largely flat result ahead of the opening bell in Europe.

Asia Session Highlights



The Royal Institution of Chartered Surveyors (RICS), a UK property professionals’ organization, said that just 18.1% of real estate agents reported falling house prices in June, a far better result than economists expected and the lowest since September 2007. Looking at the details of the survey, 14% of respondents said prices rose while 56% said prices remained the same; 30% said prices had fallen from the previous month. RICS chief economist Simon Rubinsohn noted “a lot more optimism” and referred to the recent data flow as a “wholesale shift in sentiment”. The report adds to building evidence that the UK economy is stabilizing after output shrank by the most since 1958 in the first three months of this year. Indeed, London-based think tank NIESR has reported the economy probably shrank just -0.4% in the second quarter, the slowest pace of decline in a year, while consumer confidence rose to the highest level since October 2008 in June. Still, near-term buying interest in the British Pound is far from guaranteed by improving economic indicators considering the sterling remains close to 91% correlated with the MSCI World Stock Index, suggesting a turn lower in risky assets will bring the UK unit along for the ride.

National Australia Bank’s Business Confidence gauge printed in positive territory in June, registering at 4 and showing that optimists outnumbered pessimists among the over 400 companies polled for the report for the first time in 18 months. NAB chief economists Alan Oster sounded notably less than optimistic however, saying much of the improvement can be “put down to the prospect that ‘Armageddon’ had been avoided”. Oster added that “Business conditions appear to have rebounded to a level roughly similar to that reported prior to the collapse of [Lehman Brothers] in September.” The government’s generous fiscal aid package has surely helped as well: Prime Minister Kevin Rudd and company have distributed over A$12 billion in cash handouts this year and set aside A$22 billion for infrastructure projects. A similar dynamic pushed consumer confidence to the highest level in 19 months in July according to Westpac Baking Corp. Clearly, the big question going forward is if current momentum can be maintained after the current euphoria subsides and the flow of stimulus cash dries up. On balance, the outlook is far from rosy: the labor market continues to suffer, erecting barriers to a meaningful rebound in domestic demand, while the latest trade data reveals lackluster overseas demand for coal and iron ore, Australia’s top export commodities.

Euro Session: What to Expect



The UK Consumer Price Index is expected to show that the annual pace of inflation fell to 1.8% in June, the first time that prices slipped below the Bank of England’s 2% target rate since September 2007. The leading producer price index fell more than economists expected last week, opening the door for a downside surprise this time around as well. The BOE acknowledged in their latest inflation report that “CPI inflation is likely to drop below the 2% target later this year” and still opted to keep monetary policy unchanged at this month’s meeting. Still, the British Chamber of Commerce has urged policymakers to expand their asset-buying scheme by 25 billion pounds, saying a recovery is “not guaranteed”; the call for further easing has been echoed by the Shadow Monetary Policy Committee, a group of independent economists that meet at the Institute of Economic Affairs. The disparity in growth forecasts is also notable: the IMF expects the UK economy will grow 0.2%, a survey of economists conducted by Bloomberg points to a 0.9% result, while the OECD says growth will be flat in 2010. If reality proves to side with the pessimists in the days ahead, slower output growth could well translate into a steeper than expected decline in inflation, calling for the BOE to step up easing efforts. Separately, the DCLG House Price measure is set to show property values fell -12.6%, the smallest drop since February.

Turning to the continent, Germany’s ZEW Survey of investor confidence is expected to see the headline figure rise to 47.8 in July from 44.8 in the previous month, the ninth consecutive improvement and the highest reading since May 2006. The broader Euro Zone ZEW result is set to follow a similar trajectory, rising to 44.0 in July. Still, improvements in the metric are unlikely to offer much near-term support to the Euro: the ZEW reflects the forward-looking perspective of the poll’s respondents, meaning the reading tends to lead the single currency by a significant margin such that the trend in the closely watched Expectations component of the report has corresponded inversely with major tops and bottoms in the exchange rate. Indeed, the ZEW began to trend lower in the beginning of 2006 and bottomed out in July of last year; the same end-points mark the boundaries of the last major uptrend in EURUSD that saw the pair test record highs above 1.60. If the same dynamic continues to hold, traders can expect the European unit to set a bottom as the ZEW tops out, a scenario that seems unlikely for the time being considering how much ground remains to be covered before the economy regains firm footing. In fact, according to the International Monetary Fund (IMF), the Euro Zone as a whole and Germany in particular stand apart from most industrialized countries in being expected to see GDP contract in 2010.

Overall, risk sentiment is likely to usurp the limelight once again in European trading hours. Second quarter earnings announcements from Goldman Sachs and Johnson & Johnson late into the session are likely to be of particular significance, with traders looking to Wall St to set the pace for where risky assets go in the days ahead. Indeed, forex markets largely oscillated in overnight trading despite hefty gains across Asian stock exchanges with the upswing in confidence already priced in during US hours.

Written by Ilya Spivak, Currency Analyst
Article Source - Forex Markets to Trade with Risk Appetite, Goldman and J&J Earnings in Focus (Euro Open)

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