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Catalan tensions ease, as markets look to US payrolls

Yesterday’s ruling by the Spanish constitutional court to suspend the Catalan parliament on Monday wasn’t entirely unexpected as the government in Madrid look to head off steps to call for independence by Catalan politicians, however short of a military presence there is little that Spanish politicians can do to physically stop the parliament convening anyway, which is what is expected to happen next week anyway.

As it is politicians in Catalonia are starting to disagree as to what the next steps are likely to be, in the wake of banks making preparations to relocate elsewhere, and it is these disagreements that have seen Spanish bonds and equity markets recover some of their poise. An organised opposition is always a more signficant proposition, and currently this is far from the case.

Despite the splits amongst Catalan lawmakers the language of government officials in Madrid doesn’t make any sort of negotiated settlement in the near term particularly likely. The sort of inflammatory language used by Spanish finance minister De Guindos in calling Catalan officials “insane” is hardly conducive to encouraging moderate voices to come forward, and prevent a damaging schism. It wouldn’t hurt politicians in Madrid to indulge in some velvet glove politics as opposed to the sledgehammer approach, which proved so damaging last weekend.

As such this saga could well be in the early stages of a political stand-off between Barcelona and Madrid, as the separatists try and extract some concessions from Madrid while keeping the nuclear option of declaring independence in their pocket.

In the US, equity markets continued their upward path yesterday setting new records once again while the US dollar has continued its recent rebound on expectations that we will get some form of tax reform in the coming weeks.

Recent economic data has also pointed to an improving economic outlook with this week’s ISM surveys pointing to improved economic activity in spite of the disruption caused by hurricanes Irma and Harvey.

Not only were the headline numbers well ahead of expectations but the internals of the manufacturing and the services reports pointed to improvements in new orders, employment as well as rising inflationary pressure in the form of sharp increases in prices paid, as the odds increase further of a December rate rise.

This is likely to filter down into an increase in inflationary pressure as these rises get passed down the supply chain, and in turn lead to higher wages. So far we’ve seen little evidence of that in the headline inflation numbers or in wages, so today’s wages numbers will be closely monitored for evidence of that. Average hourly earnings are expected to remain unchanged at 2.5% on an annualised basis, however if the monthly numbers show a bigger than expected rise of 0.3% we could well see further US dollar gains.

The headline payrolls report is expected to show some disruption as a result of the recent storms, with a sharp dip in jobs gained similar to Wednesday’s ADP report. August saw a surprisingly disappointing 156k and today’s September number is expected to come in below the 100k level at about 80k, the lowest level this year. The unemployment rate is expected to come in unchanged at 4.4%.

Anything in line or above expectations should be treated as US dollar positive, however any gains are likely to be fairly limited given the gains seen already this week, while a disappointing number could trigger some profit taking.

The pound has had another poor week its third weekly decline in a row, as concerns about political instability as well as disappointing economic data have undermined sentiment.

More self-indulgence from Conservative party MP’s over the future of Prime Minister Theresa May has pushed the pound back to levels last seen at the beginning of August. Even if they were able to get her to step down it is not immediately clear who would replace her. Foreign Secretary Boris Johnson has put quite a few noses out of joint with his recent behaviour and might prove to be quite divisive, while none of the other possible candidates would appear to have the required support.

It seems likely that this discontent will once again amount to nothing more than hot air in the short term at least. The last thing the currency, the Conservative party and more importantly the country needs right now is the self-indulgence of another leadership battle.

EURUSD – continues to drift lower and remains on course for a test of the 1.1600 level while below the 1.1830. A break below 1.1670 could complete a potential head and shoulders reversal which could target a move back to the 1.1200 area.

GBPUSD – broke through support at the 1.3220 area and now looks set to test 1.2960 trend line support from the March lows of 1.2100. A move back through 1.3340 is needed to stabilise and argue for a move back to 1.3420.

EURGBP – having pushed through the 0.8900 area we look set for a return to the 0.8970 area, and possibly a retest of the 50 day MA at 0.9020. Support now sits back at the 0.8900 area and below that at the 0.8820 area.  

USDJPY – still finding selling interest near the 113.20 level, but feels like we could extend towards 114.00. A failure here retargets the 112.20 level and below that a return towards 111.30.

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