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Equity optimism continues, China trade data in focus

Equity optimism continues, China trade data in focus

Equity markets in the US rallied yesterday as traders remain hopeful the Federal Reserve will cut interest rates. 

Dealers remain divided as the size of the cut and when we might see the rates being lowered, but the view across the board is that monetary policy will be loosened. Stocks in Europe started off strong, but the bullish sentiment faded, and they largely finished in the red.

Jerome Powell, the Federal Reserve chief, left the door open to interest rate cuts, and that helped the Dow Jones trade above 27,000 –for the first time ever. Given how much expectations have been built up, markets are likely to react badly should interest rates be kept on hold later this month. The Fed boss might trim rates later this month, and drop another hint about potentially lower rates later this year as a way of keeping equity markets on side. There has been a lot of talk of rates being cut by 50 basis points, but some people think that would be excessive when you remember that the unemployment is close to a 50 year low.  

There were mixed inflation reports from the US yesterday, the headline CPI reading fell from 1.8% to 1.6% - a four month low. While the core CPI reading edged up to 2.1%, and the core measurement is a better indicator of underlying demand. Seeing as the headline cost of living is falling, it takes even more pressure of workers, and that is possibly why core CPI is on the rise.

Overnight, stocks in Asia traded a little higher as traders looked ahead to the Chinese trade data report, which will be released later today. Imports are tipped to be -4.5%, and the May report showed a drop of 8.5%. Exports are expected to a show a fall of 2%, and the previous report showed a 1.1% rise.   

French inflation held steady at 1.4%, while German inflation edged up to 1.5%, from 1.3%. It is encouraging to that demand is picking up in the Europe’s largest economy. Traders are still mindful of the European Commission’s growth forecast for the eurozone, and the body believes that Germany, France and Italy will all have small levels of growth.

Sterling was given a hand by the Bank of England financial stability report. The fear of a possibility of a no-deal Brexit is on the rise, but the UK has become more prepared for such an event, and the banking system can withstand a disorderly Brexit.                       

Oil edged lower yesterday after the energy surged on Wednesday. OPEC predicted that demand in 2020 will dip, and that forecast prompted some profit taking in the wake of the massive rally in the previous session.  

Eurozone industrial production is due out at 10am (UK time), and the consensus estimate is 0.2% on a monthly basis.

At 1.30pm (UK time) the PPI report will be released and the reading is tipped to be 1.6%, while the core PPI rate is expected to be 2.2%.    

EUR/USD – has fallen back into the wider downtrend and a move back below 1.1200 might pave the way for the 1.1110 area to be retested. 1.1400 might act as resistance.

GBP/USD – has been driving lower since mid-March, and if the bearish move continues it might encounter support at 1.2365 region. The 1.2800 area might act as resistance.

EUR/GBP – has rallied for over two months, and if it holds above 0.8800, it might bring 0.9000 into play. A move to the downside might bring the 200-day moving average at 0.8785 into play. 

USD/JPY – has been in a down trend since late April, and if the bearish move continues it might target the 106.00 mark. Resistance might be found at the 50-day moving average at 109.02.

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