LONDON (SHARECAST) - A recovery in risk appetite yesterday saw the US dollar continue to come under pressure across the board as it fell to its lowest level against a basket of currencies since early May. This pressure intensified after the release of further economic data fell short of analysts forecasts. ISM Non-Manufacturing data for June came in at 53.8 against an expectation of 55, and not only that the employment part of the index fell below the key 50 level to 49.7. Following on from last week’s poor ISM data the signs point to a significant slow down in the US recovery. The euro was also helped by news of a successful Spanish government €6bn 10 year bond sale, which was met with healthy demand from overseas as well as at home. This has prompted speculation that maybe Spain’sproblems aren’t as bad as they are painted. This month’s bank stress tests could well confirm that one way or the other. Today the markets should hear about the methodology of one of the stress tests that simulates the impact of a severe economic shock on about 100 banks in the euro zone as well as countries outside it. Already France, Germany, Spain and Austria have stated that everything is fine with their banks, fuelling concern in the markets that the tests won’t be anywhere near rigorous enough. Sterling was weighed down yesterday by concerns expressed from the British Chamber of Commerce that activity in the services sector remains relatively sluggish and warns that many of the factors supporting growth have been only temporary and the economy faces serious headwinds. Despite the fact that the survey came across as relatively positive it would appear that this could well have already been priced in, hence the rather tepid response. With little in the way of UK and US data today, it is likely that the markets will focus on the EU GDP revision for Q1 which is expected to be unchanged at 0.6%, and German factory orders for May. EURUSD – Yesterday’s poor US data has further undermined the dollar and sent the single currency to its highest level in six weeks stopping at the 1.2670 resistance area. This recent rally in the Euro looks set to test the down trend line resistance from the 1.5142 highs in December, which comes in at the 1.2760 level. The inverse head and shoulders pattern break we saw last week continues to dominate sentiment and the risk remains for further gains while above the 50 day moving average around the 1.2450 level and this area needs to hold for further upside to be forthcoming. The Euro should also find support around the 1.2570/80 area. GBPUSD – the pounds inability to break above the recent highs and resistance around the 1.5230/50 area is a concern especially given that the Euro has been able to make new highs. The key resistance levels on the top side remain around the 50% retracement level of the 1.6460-1.4230 down move at 1.5345, as well as trend line resistance from the November 2009 highs at 1.6880 which now comes in around the same level. Dips should be confined to the interim support area around 1.5080 which has held for the past couple of days. A break below these lows could well yield up a deeper test towards 1.4980. EURGBP – the lower euro scenario appears to be under threat now we have broken above the resistance around the 0.8320/30 area. We need the June 2009 lows and old support to keep a lid on this short squeeze around 0.8400. This was the long term support, the break of which targeted the move below 0.8170 last month. Longer term the objective remains for a test towards 0.8000 on the way to 0.7785 over the coming few month’s which is a 61.8% Fibonacci retracement of the 3 and half year up move from 0.6570 to 0.9805. USDJPY – the 88.00 area continues to cap the dollar and yesterdays poor US data did nothing to help overcome this resistance in that respect. While US yields look weak the yen will continue to gain irrespective of risk appetite. The US dollar looks to be set to head towards 84.80 by way of support around 86.80. A recovery back above 88.20/30 is needed to stabilise the dollar in the short term.

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