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High hopes for North American trade deal, US core PCE in focus

It was another stellar session last night for US stocks. 

The S&P 500 and NASDAQ racked up all-time highs again, as optimism about a trade deal with Canada and positive broker recommendations for certain tech stocks drove the indices higher.

US equity markets were in good shape during the week on account of the new trade agreement that was struck between the US and Mexico. Yesterday we heard from two high ranking Canadian politicians, Justin Trudeau, the prime minister, and Chrystia Freeland, the foreign minister, and both were optimistic about a deal being reached in the near-term. President Trump has made a lot of noise about hammering out new trading arrangements to better suit the US, and he is clearly making progress, and he is confident that Canada will agree to the new trading terms by tomorrow.

The preliminary US GDP reading for the second-quarter was 4.2%, and no doubt Mr Trump will be boasting about that. The latest core Personal Consumption Expenditure (PCE) report will be released at 1.30pm (UK time) and the consensus estimate is 2%.  The core PCE reading is the Federal Reserve’s preferred measure of inflation, and the US dollar will be in focus.

Some traders have been questioning the lofty valuations of certain tech stocks, and yesterday we saw ambitious price targets for Amazon and Alphabet, from Morgan Stanley. The bank issued a price target of $2,500 for Amazon and $1,515 for Google’s parent Alphabet. Apple’s share price reached an all-time high too as the stock got caught up in the bullish sentiment.

It is not just North America that is buoyed by the prospect of improved trading relationships. Michel Barnier, the EU negotiator, confirmed he is keen to offer the UK a deal that has never been offered to another country. Sterling soared on the back of the announcement as traders perceived it as a compromise to the impasse in the Brexit discussions. The situation is far from solved, but for now traders are optimistic about the pound on the back of the news. Some people might argue that Brussels have become more accommodating in light of the increased chatter about the possibility of a ‘no-deal Brexit’.

While things are picking up for the UK, Turkey is still struggling as an economic sentiment indicator slipped to its lowest level in nine years. The disappointing update comes after Moody’s downgraded 20 of the country’s financial institutions. The slide in the Turkish lira sends out the wrong message, and it becomes a vicious circle of weak investor confidence. The eurozone is exposed to the country, and even though the markets are concerned at the moment, if the problems persists, it is likely to become at issue.

The eurozone also has Italy to contend with too, as creeping borrowing cost could become a problem for the indebted nation. There was talk that the Rome administration asked the European Central Bank to buy their bonds in order to keep a lid on their yields. The euro will be in focus this today as Germany will release a couple of important economic updates. At 8.55am (UK time) the German unemployment rate will be released and traders are anticipating 5.2%. Germany’s inflation report will be revealed at 1pm (UK time) and economists are expecting 2%.    

EUR/USD – has been bouncing back for over two weeks, and if the positive move continues it could target 1.1850. Pullbacks find support at 1.1616 – the 50-day moving average.      

GBP/USD – has been pushing higher since the middle of the month, and the 50-day moving average at 1.3047 could act as resistance, and beyond that 1.3250 could act as a hurdle. A move to the downside might find support at 1.2800.

EUR/GBP – has been pushing higher since April and if the bullish run continues it could target 0.9100. A move lower might find support at 0.8970 or 0.8900. 

USD/JPY – the upward trend that began in March is still intact, and if the positive move continues it might target 112.15. Support might be found at 109.81 – the 200-day moving average.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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