Talking Points

• Euro: Spanish Bank Borrowing Hits Record-High, GDP Contracts 0.2%
• British Pound: U.K. Inflation Tops Forecast, Remains Capped By 100-Day SMA

Euro: Spanish Bank Borrowing Hits Record-High, GDP Contracts 0.2%

The Euro pared the overnight advance to 1.2384 as commercial bank in Spain borrowed a record EUR 376B from the European Central Bank in July, while the advance GDP report showed the growth rate contracting 0.2% in the second-quarter after holding flat during the first-three months of 2012. As the debt crisis continues to drag on the real economy, there were reports that Germany’s highest court will not delay its ruling on the European Stability Mechanism scheduled for September 12, and it seems as though the European Central Bank will implement a range of tools over the coming months as the region face a growing risk for a prolonged recession.

Beyond the bond purchase program, market participants are still pricing an 83% chance for a 25bp rate cut according to Credit Suisse overnight index swaps, and we may see the ECB push the benchmark interest rate to a fresh record low at the September 6 meeting as the Governing Council waits for Germany to approve the permanent bailout package. As the EURUSD remains capped by the 50-Day SMA at 1.2393, we should see the exchange rate consolidate going into the middle of the week, and we will maintain our bearish outlook for the pair as it continues to carve out a lower top in August. With the GDP report out of the way, we will be keeping a close eye on the CPI figures due out on Thursday, and easing price pressures across the euro-area may produce a bearish reaction in the EURUSD as it raises the risk of undershooting the 2% target for inflation.

British Pound: U.K. Inflation Tops Forecast, Remains Capped By 100-Day SMA

The British Pound spiked to a high of 1.5728 as the headline reading for U.K. inflation unexpectedly tipped higher in July, and sticky prices may continue to prop up the sterling as it dampens the scope for additional monetary easing. Indeed, consumer prices increased an annualized 2.6% in July after expanding 2.4% the month prior, while the core rate of inflation advanced 2.3% during the same period to mark the fastest pace of growth since March. As market participants turn their attention to the Bank of England Minutes on tap for tomorrow, we’re more interested in seeing the vote count as Governor Mervyn King talks down speculation for a rate cut, and it seems as though the Monetary Policy Committee will endorse a wait-and-see approach over the coming months as growth and inflation gradually picks up. Despite the strong inflation print, the GBPUSD has made another failed attempt to test the 100-Day SMA at 1.5756, and we may see the pound-dollar consolidate in the days ahead as it maintains the range-bound price action carried over from June.

FX Upcoming

— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

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Will the EUR/USD Resume the Downward Trend From 2011? Join us in the Forum

Related Articles: Weekly Currency Trading Forecast

The prices of precious metals, much like many other commodities, changed direction from last week and declined on Monday. The speculations around the future plans of ECB and Bank of China in regards to their respectivestimulus plan could continue influencing bullion traders. Currently, gold and silver prices are rising. On today’s agenda: Great Britain CPI, Euro Area GDP 2Q2012, German and Euro Area ZEW economic sentiment, U.S. Retail Sales, Euro Area Industrial Production and U.S. Producer Price Index.

On Monday, Gold declined by 0.63% to $1,612.6; Silver also fell by 1.05% to $27.77. During August, gold edged down by 0.12%; silver, by 0.53%.

As seen below, the chart presents the changes of normalized prices of precious metals in during the month (normalized to 100 as of July 31st). During August gold and silver didn’t do much.

On Today’s Agenda

Euro Area GDP 2Q2012 Report: Euro Stat will also publish the GDP growth rate of the Euro Area. According to the previous report, during the first quarter of 2012, the Euro Area GDP didn’t grow (Q-o-Q). This news might affect the Euro; the current expectations are of another a low growth rate or even another contraction for the second quarter;

U.S. Producer Price Index: In the recent report regarding June this index for finished goods edged up by 0.1% compared with May’s rate and increased by 0.7% in the last 12 months; this news might affect bullion rates;

Euro Area Industrial Production: in the previous report the EU industrial production was up by 0.6% (M-O-M) during May;

Currencies / Bullion Market –August Update

The Euro/ USD changed direction and rose on Monday by 0.35% to 1.2333. Alternatively, other currencies including AUD and CAD depreciated on Monday against the USD. The linear correlation between gold and Euro is still strong: during the month, the correlation between the gold and EURO/USD was 0.558 (daily percent changes). Therefore, if the Euro will trade up against the USD, it could eventually pull up precious metals.

Daily Outlook

Despite yesterday’s fall, bullion rates might resume their slow growth from last week: the upcoming U.S reports including PPI and retail sales could affect bullion prices as indicated above. On the other hand, the upcoming EU reports including German and EU economic sentiment, GDP and industrial production could affect not only the Euro but also bullion rates. If these reports will continue to show little progress in the EU economic activity, it could pull down the Euro, which tends to be positively correlated with precious metals. Finally, if the Euro and other “risk currencies” will trade down against the USD it could curb the rally of precious metals rates.

For further reading: Gold & Silver | Weekly Outlook August 13-17

By: Lior Cohen, M.A. in Economics, Commodities Analyst and Blogger at Trading NRG

Would you like to see more third-party contributors on DailyFX? For questions and comments, please send them to research@dailyfx.com

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) remains 0.17 percent higher from the open after moving 76 percent of its average true range, and the reverse currency may track higher over the remainder of the week as an upward trending channel appears to be taking shape. As the dollar builds a short-term base in August, we may see a bullish breakout in the greenback, but the index looks poised for a short-term pullback before a larger move to the upside as the 30-minute relative strength index approaches overbought territory. Nevertheless, we would like to see the dollar close above the 10,050 figure to reinforce our bullish call for the reserve currency, and we should see the greenback strengthen further over the remainder of the year as the fundamental developments coming out of the U.S. continues to dampen the Fed’s scope to expand the balance sheet further.

Indeed, the sharp rebound in U.S. retail sales paired with the uptick in core producer prices has propped up the dollar, and the pickup in growth and inflation may encourage Fed Chairman Ben Bernanke to further soften his dovish tone for monetary policy as the recovery gradually gathers pace. According to Credit Suisse overnight index swaps, market participants are starting to price-in a rate hike for the next 12-months, and the rise in the interest rate outlook should carry the dollar higher as the FOMC slowly moves away from its easing cycle. In turn, we’re feeling more confident that the USDOLLAR is in fact carving out a higher low in August, and we are still looking for a fresh yearly highs in the index as the upward trending channel from earlier this year remain intact. As we have U.S. CPI on tap for tomorrow, a stronger-than-expected inflation print may fuel another bullish reaction in the USD, and we should see the Fed continue to talk down speculation for QE3 as the world’s largest economy gets on a more sustainable path.

Two of the four components weakened against the greenback, led by a 0.65 percent decline in the Japanese Yen, and the low-yielding currency may continue to lose ground against its U.S. counterpart as the Bank of Japan continues to talk up speculation for additional monetary support. Indeed, the policy meeting minutes showed a few members arguing that the central bank shouldn’t rule out any options in advance as they aim to achieve the 1 percent target for inflation, and it seems as though the board is looking beyond its current policy tools amid the ongoing weakness in the real economy. As the USDJPY continues to build a short-term base around the 78.00 figure, the pair certainly looks poised for a sharp move to the upside, but we may see the dollar-yen continue to consolidate over the near-term as the BoJ maintains a wait-and-see approach.

— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

To be added to David’s e-mail distribution list, send an e-mail with subject line “Distribution List” to dsong@dailyfx.com.

Join us to discuss the outlook for the major currencies on the DailyFX Forums

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Despite a European session that included major releases like Euro-zone GDP, UK inflation and German economic sentiment, volatility remained extremely low in currency trading. EURUSD is only up about twenty points at the time of the release.

The French GDP for 2Q kicked off the session’s data releases by remaining unchanged over the quarter. Apparently no news was good news, as the release beat expectations for a 0.1% drop off and the currency continued trading above 1.2350. French Finance Minister Pierre Moscovici said the perspective for growth in the third and fourth quarter is better than the first half of the year. The government is expecting a 0.3% growth in GDP for the year.

The Euro continued to rise as the German economy was reported to have expanded more than expected, the GDP was up 0.3% over the quarter. UK annual inflation unexpectedly rose to 2.6%, giving GBPUSD a temporary boost past 1.5710 resistance.

Finally, the decline of Euro-zone GDP in 2Q had a small splash in the markets, as the 0.2% quarter over quarter decline was as expected. However, the ZEW survey for economic sentiment showed that the experts’ outlook for Germany worsened, and the report said export related sectors could be affected.

The Euro continued to decline back under 1.2350 following the ZEW report, keeping only a small part of the day’s gains. Despite a longer term down trend, the Euro continued a 3-week uptrend against the US Dollar in today’s session. There could be possible resistance at 1.2435, by the 61.8% retracement of July’s declines. The upward trend line could possibly provide support around 1.2300.

Traders should look towards the US retail sales, set to be released at 12:30 GMT, as the next possible market mover.

EURUSD 15-minute: August 14, 2012

— Written by Benjamin Spier, DailyFX Research

“Meet the DailyFX team in Las Vegas at the annual FXCM Traders Expo, November 2-4, 2012 at the Rio All Suite Hotel & Casino. For additional information regarding the schedule, workshops and accommodations, visit the FXCM Trading Expo website.”

Talking Points

• Crude Oil, Copper Rise as Risk Appetite Firms on European GDP Data
• Gold and Silver Find Support in Ebbing Haven Demand for the US Dollar

Commodity prices are on the upswing as market-wide risk appetite finds support after marginally stronger than expected French and German second-quarter GDP figures. The region-wide GDP print registered in line with forecasts. Growth-linked crude oil and copper prices are following shares higher while gold and silver are seeing a de-facto boost as fading haven demand weighs on the US Dollar.

From here, the spotlight shifts to July’s US Retail Sales report. The reading will help establish the degree of follow-through on the stronger-than-expected jobs growth figures published earlier this month. Economists’ forecasts suggest receipts will add 0.3 percent, marking the strongest reading in four months.

As we discussed in our weekly fundamental briefing, the markets are likely to take this week’s economic data flow at face value, interpreting results in terms of their implications for growth rather than stimulus expectations. That means a firmer Retail Sales number stands to reinforce the emerging risk-on environment. Indeed, S&P 500 stock index futures are pointing meaningfully higher in European hours, hinting commodities are likely to remain well-supported as Wall Street comes online.

WTI Crude Oil (NY Close): $92.73 // -0.14 // -0.15%

Prices continue to test resistance in the 93.21-90 area marked by the July 19 high and the 50% Fibonacci retracement. Near-term support remains at the psychologically significant 90.00 figure, a barrier is reinforced by the 38.2% retracement at 89.87. A break below the latter level exposes a rising trend line set from early July, now at 88.63. Alternatively, a push above resistance initially targets the 61.8% Fib at 97.82.

Daily Chart – Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1609.75 // -10.45 // -0.64%

Prices continue to drift below resistance in the 1620.45-35.70 congestion area. Near-term support remains at a rising trend line support set from late June, now at 1594.59. A break below this boundary exposes a longer-term trend line established from the May 16 bottom, currently at 1575.20. Alternatively, a push above resistance initially targets 1677.79, the May 1 swing high.

Daily Chart – Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $27.81 // -0.32 // -1.12%

Prices continue to tread water after taking out resistance at 27.68. Near-term resistance lines up at 28.44, with a break above that exposing 29.42. Alternatively, a reversal back through support targets a rising trend line at 27.24 and the May 16 low at 26.75.

Daily Chart – Created Using FXCM Marketscope 2.0

COMEX E-Mini Copper (NY Close): $3.354 // -0.038 // -1.12%

Prices broke through support at 3.387 after recoiling from resistance at a falling trend line set from the April 3 high. Sellers now aim to challenge triple bottom support at 3.300. The 3.387 level has been recast as near-term resistance, with a break above that targeting 3.435.

Daily Chart – Created Using FXCM Marketscope 2.0

— Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

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Talking Points

• All Eyes on Eurozone 2Q GDP Report to Shape Risk Appetite Trends
• Markets to Read Economic News Directly, Not in Terms of Stimulus
• US Retail Sales Expected to Yield Strongest Outcome in Four Months

A busy calendar of economic data promises to finally nudge financial markets out of complacency. Second-quarterEurozone GDP figures headline the docket. While softer readings compared with the first quarter will not be surprising – indeed, a recession in the region is readily accepted as consensus view across financial markets at this point – the degree of downturn will be important to monitor and may prove market-moving. As we discussed in our weekly fundamental briefing, outcomes that fall short of expectations are likely to be read as negative for risk appetite, weighing on the Euro as well as stocks-linked currencies.

Separately, the German ZEW gauge of investor confidence is expected to drop to the lowest since July 2010 at 17.5 in August. The forward-looking Economic Sentiment sub-index is expected to print at -19.3, within a hair of the six-month low of -19.6 recorded in July. Meanwhile, UK CPI is set to put the annual inflation rate at the lowest since November 2009 at 2.3 percent. On balance, both outcomes are unlikely to prove particularly market-moving, the former overshadowed by GDP data and the latter made largely moot by firmly anchored Bank of England monetary policy expectations.

Later in the session, the spotlight shifts to July’s US Retail Sales report. The reading will help establish the degree of follow-through on the stronger-than-expected jobs growth figures published earlier this month. Economists’ forecasts suggest receipts will add 0.3 percent, marking the strongest reading in four months. On the sentiment front, S&P 500 stock index futures are pointing cautiously higher to warn that safe-haven US Dollar and Japanese Yen may find themselves under pressure against their top counterparts. The critical mass of top-tier event risk on the docket may rapidly change the landscape in the hours ahead however.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

— Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

To be added to Ilya‘s e-mail distribution list, send a note with subject line “Distribution List” to ispivak@dailyfx.com