Financial markets have continued to ebb and flow on the currents and eddies of events in the Middle East over the past 48 hours.
It is quite clear that investors are still nervous that the various chess games being played out in the shadows could cause one side or the other to overplay their hand, however it is clear that neither side wants to go down the route of an outright break out of hostilities.
Markets initially sank quite sharply Wednesday morning on the announcement of Iranian missile strikes on Iraqi air bases, reflecting this continued anxiety, however they recovered some of their poise after it became apparent that they were a ladder to allow both sides to pause and reflect on recent events, without losing face domestically.
On Iran’s part, the supreme leader Ali Khamenei called the strikes a “crushing response” on state TV, while internationally it soon became apparent that Iranian forces had forewarned Iraqi forces that the missiles were coming their way, allowing time for their personnel, along with US personnel to get clear.
As a result, gold and oil prices quickly slipped back after spiking higher initially, with crude oil prices sinking back to levels last seen before Christmas.
This sharp change in sentiment was also down in part to comments from US President Trump, who while adopting a tough tone towards Iran, also played along by saying that he felt Iran was ready to take a step back, and as such there was no need for further military action on the part of the US.
This dialling down of tensions in turn helped push European markets finish the day higher, as well as helping to push, both the S&P500 and the Nasdaq to new record highs.
The new record highs and strong finish for markets in the US yesterday look set to see markets here in Europe pick up where they left off and open higher this morning, carrying over the relief rebound from last nights close.
On the data front manufacturing in Europe has continued to struggle after German factory orders in November fell by 1.3%. this weakness only serves to reinforce the narrative of a struggling manufacturing sector being offset by improvements in services, something that could well be reaffirmed by today’s industrial production numbers for the same month.
On the trade front German exports are expected to decline 0.9% highlighting the weak state of the global economy, as trade concerns weigh on economic activity. Imports are expected to rise slightly by 0.1%.
In the US, doubts about the US labour market still appear wide of the mark after a bumper ADP payrolls report of 202k for December, which saw a strong rebound from a weak 67k number in November, though this was also revised up to 124k.
It also underscores why Federal Reserve officials appear so confident about their forecasts for interest rates in the wake of last week’s FOMC minutes. They also bode well for consumer confidence and consumer spending ahead of Friday’s payrolls report, which is also expected to do well, though probably not as strong as November’s 266k.
EURUSD – the euro has continued to struggle slipping further away from its recent peaks above 1.1200, with a break below 1.1100 potentially opening up a move back towards the 1.1040 area. Currently in a minor uptrend from the October lows but needs to take out the 1.1250 area to signal further gains towards 1.1400.
GBPUSD – still in the uptrend from the lows in September, despite failing to push above 1.3220 yesterday. The fall from the 1.3500 highs last month found support at the 1.2920 area, and would need a break of this and 50-day MA to signal further declines. We need to move above 1.3220 to target 1.3500.
EURGBP – support currently appears to be holding at the 0.8450/70 area, and while above here the risk is for a move back to the highs last month and 0.8600 resistance. Above 0.8600 targets the 0.8800 area.
USDJPY – yesterday’s fall to 107.65 was quickly reversed with the risk that we could well retrun back to the 109.20/30 area. This appears to be the range for the time being with a break either side determining the next move here.