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Europe set to open lower as US government shutdown looms

It’s been a rollercoaster week for US markets with intraday moves of 300-400 point in a day on the Dow, setting new record highs into the bargain and having seen such a strong rally on Wednesday, we gave some of that back yesterday after failing to move significantly beyond the highs set earlier in the week.

This was despite another set of economic data which provided further evidence that we might see inflationary pressure start to take hold in the coming months.

Yesterday’s weekly jobless claims dropped sharply last week to 220k their lowest level since 1973, and a 41k drop on the week. With claims this low it can surely only be a matter of time before wages start to move higher, and with that in mind bond market yields continued to move upwards with the 2 year yield hitting another nine year high and the 10 year yield moving beyond last year’s high at 2.63%, and closing at highest level since 2014.

With US stocks once again hitting record highs this week, the weekend fast approaching, and a growing impasse in Washington showing no signs of being broken, we saw some light profit taking as the prospect of a US government shutdown came closer to being realised.

This weakness is likely to translate into a lower European open this morning in a week where European stocks have struggled for direction, against a continued difficult and uncertain political backdrop in Germany.

It’s been another decent week for the pound as it looks set to post its fifth successive weekly rise in a row against the US dollar. A new post Brexit vote high of 1.3943 this week has raised expectations of a move through the 1.4000 area in the next few days in the hope that a more convivial tone will develop between Brussels and London as the prospect of the upcoming trade talks looms on the horizon. While that remains highly optimistic, sterling short positions have continued to get squeezed hard.

The latest economic data has continued to paint a fairly decent if a little lacklustre outlook for the UK economy, and the recent retail trading updates have painted a picture of a challenging retail outlook. Despite the squeeze on UK consumers, which showed little sign of letting up in the latest inflation numbers, the Christmas trading numbers for a number of retailers were more positive than expected with food retail doing particularly well.

The more discretionary spending was slightly more challenging but even there we saw some outperformers in the shape of Next, Primark and Boohoo.com.

Today’s latest UK retail sales numbers for December are unlikely to be as positive as the November figures were where Black Friday presales helped boost numbers to 1.1%, but it would be surprising if they are as bad as some are predicting.

The recent BRC retail sales numbers for December showed an unexpectedly positive number of 0.6%, so despite general expectations that the official retail sales numbers for December could show a sharp decline in the region of -0.9%, we could see a number that comes in better than that.

That in term would bode well for next week’s preliminary Q4 GDP number.

EURUSD – drifted down to the 1.2160/70 level which is holding for now. As long as it does the bias remains for a move towards the 1.2600 area and 61.8% retracement level of the 1.3995/1.0340 down move, on a move through the 1.2300 level. Below 1.2160 argues for 1.2090.

GBPUSD – we’ve seen the pound move above the 1.3900 area but the key resistance sits at the 1.3980 area which is the 38.2% retracement of the 1.7190/1.1950 down move and a significant obstacle to a move through to 1.4000. Support comes in at this week’s low at 1.3725 and the 1.3650 area.

EURGBP – continues to look soft after this week’s failure to overcome the 100 day MA at 0.8910. A move below the 0.8800 area has the potential to target a move back to the 0.8740 area. Above 0.8910 targets the 0.9000 area.

USDJPY – after finding support at the 110.10 area this week we need to move above the 111.50 area to retarget the 112.00 area.

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