US stock markets rallied yesterday after Jerome Powell, the head of the Federal Reserve, said the interest rate is ‘just below’ the neutral rate.
The update was less hawkish than the one in early October when the central banker claimed rates were a long way off the neutral rate. Traders viewed the update as a sign that the Fed will be pursuing a less aggressive monetary tightening policy. One of the reasons US stocks sold-off aggressively in October was because there was a fear the Fed would hike rates four times over the next 12 months, but dealers are now far less fearful of tighter monetary policy. The announcement, prompted dealers to snap up relatively cheap stocks, and sell the US dollar.
European stock markets ended the day slightly in the red as uncertainty surrounding the Italian budget, Brexit and the trading relationship between the US and China loomed over the markets. After the close of business in London, Mark Carney, the governor of the Bank of England (BoE) issued a statement regarding the British banking system in relation to Brexit. Mr Carney warned that a ‘disorderly’ Brexit could cause the economy to drop by 8%, and the pound to slump by 25%. The central bank announced that no UK bank needs to raise capital following the stress test. Mr Carney claimed that banks could keep lending through a disorderly Brexit, but that scenario is unlikely to happen. The update pushed the euro a little higher against the pound, and sterling rallied against the greenback, but that was driven by Jerome Powell’s’ comments.
Stocks in Asia got off to a good start overnight due to the bullish session on Wall Street, but the markets moved lower throughout the day, and while the Nikkei 225 is still is positive territory, the Hang Seng is in the red. Investors in the Far East are looking ahead to the US-China trade talks at the G20 summit which starts tomorrow.
Oil suffered another large loss yesterday as dealers are worried about oversupply. The Energy Information Administration report showed that inventories jumped by 3.57 million barrels – its 10th weekly rise. There is chatter that OPEC and its partners will reveal a production cut next week, but Saudi Arabia announced they are not willing to reduce production on their own.
Gold was lifted by the softer US dollar yesterday, and now that the language from the Fed chief Jerome Powell is less hawkish, the metal might find it easier to attract new buyers.
German unemployment will released at 8:55am (UK time) and traders are expecting it to hold steady at 5.1%. The CPI reading is due out at 1pm (UK time) and the consensus estimate is 2.3%, which would be a decrease from the 2.4% in October.
The consumer lending, mortgage approvals and mortgage lending will be announced at 9.30am (UK time), and the consensus estimate is £1 billion, 64,550 and £3.5 billion respectively.
At 1.30pm (UK time), a few important economic reports from the US will be announced. Jobless claims is tipped to be 220,000. The core PCE report is expected to drop to 1.9%, from 2%. The indicator is the Fed’s preferred measure of inflation. Speaking of the US central bank, the Fed minutes will be released at 7pm (UK time), but I suspect yesterday’s update told us what we need to know.
EUR/USD – has been diving lower since late September and if it holds below the 1.1510/00 region, it could pave the way for the 1.1215 area to be retested. A move to the upside could run into resistance at 1.1533 – the 100-day moving average.
GBP/USD – has been broadly pushing lower since September and if the bearish move continues, it might target 1.2661. A break above 1.3000 might bring 1.3174 into play.
EUR/GBP – surged in mid-November and if the bullish trend continues it might 0.8939 or 0.9000. A drop below 0.8834 – 200-day moving average, might bring 0.8800 into sight.
USD/JPY – the upward trend that began in March is still intact, and if the positive move continues it might target 114.73. Support might be found at 111.39.