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Higher yields set to weigh on European open

European markets fell for the second successive day yesterday, as weak services PMIs for August, along with concerns over sticky inflation briefly pushed the FTSE100 and DAX to one-month lows.

With oil prices jumping to their highest levels since November after OPEC+ extended their production cuts into the end of the year, there is increasing concern that the rise in oil prices that we’ve seen since June, will put a base under the recent slowdown in prices, and keep inflation at elevated levels for longer.

This fear is being reflected in a sharp rise in bond yields on both UK gilts and US treasuries yesterday, with the US dollar also rising to 6-month highs. The rise in yields and oil prices also serves to complicate the challenge facing central banks in their battle to bear down on inflation and drive it back towards their 2% target rate.

The rise in yields also pushed US markets lower on the day and looks set to translate into a lower European open.  

Now that the malaise that has affected the manufacturing sector for all this year has spread to the services sector, the US economy appears to be setting itself apart from the rest of the world, with today’s services data expected to show a more resilient consumer. Both the August PMI and ISM numbers are expected to show that the sector is in expansion territory at 51.2 and 52.5 respectively.

Before that we get the latest German factory orders for July which are expected to see decline of -4.3% while EU retail sales are expected to decline by -0.2%.

The latest UK construction PMI for August is also set to slip into contraction territory from 51.7 in July to 49.8. 

Yesterday the RBA kept rates unchanged at 4.10% signalling little indication that rates would be going lower in the near future. The central bank was insistent that inflation remains too high, and that it will take until late 2025 for prices to return to the 2-3% target range.

Today, attention shifts towards the Bank of Canada, and the likelihood that they will do the same as the RBA in leaving rates unchanged as well as keeping their options open for the rest of the year.

Since the Bank of Canada last raised rates back in June, the headline rate has remained at 5%. At the last set of jobs numbers, the Canadian economy saw a net decline of -6.4k jobs, with most of those jobs lost being part-time in nature.

The unemployment rate edged up to 5.5% and to its highest level since January 2022. With wage growth at 5% and the economy growing at 0.3% in June the increase in rates does appear to be slowly acting as a brake on the Canadian economy with consumer spending slowing to stall speed over the last couple of months.

With the central bank saying that inflation is unlikely to return to target until 2025, no changes are expected today with rates staying at 5%.

EUR/USD – slipped below the August lows at the 1.0760/70 area sliding below trend line from the March lows, the break of 1.0750 area opening a move towards the 1.0630 level. Resistance remains back at the highs last week at 1.0945.

GBP/USD – slipped below the August lows at 1.2545, opening the risk of a move towards the 200-day SMA just above the 1.2400 area. For this to unfold we need to see a move below the 1.2520/30 area. Resistance at last week’s highs at 1.2750.    

EUR/GBP – continues to drift lower, despite a brief move to the 0.8570/80 area. The bias remains for a move back towards the August lows at 0.8500, while below the 0.8620/30 area.

USD/JPY – remains on course for the 150.00 area, having moved above the 147.50 area yesterday. Only a move below last week’s low at 144.50 targets a move back towards 142.00.


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