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Fed in focus as G20 finance ministers meet

Rising tensions over trade kept investors on the back foot last week as stocks slid lower on the week, and it is unlikely that this week will be much different, with attention turning to this week’s G20 finance ministers meeting in Argentina, as well as two central bank rate decisions, from the US Federal Reserve and the Bank of England.

The G20 meeting is likely to be an uncomfortable one for US Treasury Secretary Steve Mnuchin, where he is likely to come under pressure regarding the current US approach to dealing with its trade concerns, and the recent tariffs on steel and aluminium.

While investors remain concerned about tensions between the US and the rest of the world over trade, it’s also set to be an important week for the US and UK economies, with the US central bank set to pull the trigger on another rate increase this week at a time when some early concerns about rising inflation have subsided to a certain extent.

It’s not really in doubt whether we’ll get a 0.25% rate rise this week, however some of the recent data out of the US speaks to some divergence across the economy. A robust jobs markets speaks to a labour market which has a little more slack than originally envisaged. Recent consumer data on the other hand has pointed to weak spending patterns amongst US consumers.

This is a worry at a time when you would expect consumer spending to be much stronger. This could affect how Fed policymaker’s view the economy and it will be impossible to ignore the current uncertain backdrop with respect to US trade and politics, and whether it will dominate Fed thinking at this week’s press conference. How new Fed chief Jerome Powell comes across at his first press conference is likely to be an interesting dynamic in contrast to Janet Yellen’s style.

The UK is facing an important week and while no changes in monetary policy are expected on Thursday, the latest inflation numbers, due tomorrow, along with wages on Wednesday are expected to point to a narrowing gap between the two which could be supportive of a possible tightening of interest rate policy in the coming months.

The outlook for inflation in the past few weeks has continued to paint a contrasting picture to expectations that we could see it edge higher. Last week headline CPI in the EU fell to a 14 month low, rather inconvenient timing for the ECB, who have been prepping the market for a withdrawal of QE later this year.

With economic data starting to show signs of softening a little in Europe as well as the US, particularly on the consumer side, is there a risk that economic policymakers are overestimating the current optimism surrounding the global economy?

EURUSD – continues to look a little tired towards the upside with a break below the 50 day MA risking a move towards the 1.2160 level.  We need to see a move back through 1.2340 to target the 1.2400 area.

GBPUSD – currently holding below the 1.4000 area running the risk of a move back to the 1.3710 area and the low this month. We need a move back above 1.4000 to retarget the 1.4080 area.

EURGBP – continues to slip back with support around the 0.8800 area. A break below here retargets the 0.8740 area. On the top side we have resistance at 0.8840 and 0.8920.

USDJPY – the failure to sustain a move beyond the 107.20 level last week saw US dollar slide back, a failure that runs the risk of a return to this month’s lows at 105.25. We have resistance at 106.30.

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