Yesterday’s positive finish for equity markets was largely driven by the upbeat tone from Fed chairman Jay Powell in written testimony and comments to policymakers on Capitol Hill on the Senate banking committee.
His view that the Federal Reserve remained on course to keep raising rates gradually, amidst a strong and accelerating US economy and labour market, which helped boost an initially lacklustre trading session, pushing European markets to a positive close, and pulling US markets out from a negative open, propelling the Nasdaq to yet another record finish.
This strong finish is likely to translate into a positive open here in Europe this morning.
Powell’s comments also had a rejuvenating effect on the US dollar, breaking a two-day losing streak, while the pound slumped back towards its June lows over concerns that the government might have been defeated on its latest Brexit bill amendment, opening up the prospect that the Prime Minister might have faced a leadership challenge.
While the votes were won, the closeness of the margins suggests that for all the optimism that a last-minute Brexit deal could still be done, the approach of next years March deadline, means the odds of a policy mistake and a no deal Brexit appear to be increasing.
As far as the UK economy is concerned the data continues to hold up, yesterday’s unemployment data showing that employment levels remain at record highs, while the latest wages data only slowed modestly, coming in at 2.7%, keeping the prices to wages gap just about in positive territory.
This gap is likely to come under pressure today with the release of the latest June CPI numbers, and while the Bank of England has insisted that it remains confident that inflation pressures have subsided the 10% decline in the pound against the US dollar since April, will only serve to add to them.
With fuel prices moving higher again in June it is quite likely that we will see a significant uptick from May’s 2.4%, with some estimates of 2.6%. core CPI is expected to remain steady at 2.1%, while RPI is expected to move higher as well, from 3.3% to 3.5%.
It is unlikely that today’s numbers will undermine the case for a modest rate rise when the Bank of England next meets on August 2nd and Bank of England governor Carney gave no indication that his view of the economy, positive at the beginning of this month, had changed in remarks made yesterday.
It’s also inflation day for EU CPI with the final June numbers here with a slight increase to 2% set to be confirmed, up from 1.9% in May and 1.2% in April. Core prices are set to remain unchanged at 1%, ahead of next week’s European Central Bank rate meeting. No changes to policy are expected next week.
Back in the US Federal Reserve chief Jay Powell will be giving a second day of testimony, however it is unlikely to differ much from yesterday’s upbeat assessment of the US economy, while the release of the June Beige Book should underscore the US central banks optimistic view of how the economy is faring.
EURUSD – continues to consolidate above support at the 1.1620 area with resistance now just below last week’s high at 1.1760. Only a move back below the 1.1600 area opens up a retest of the May lows at 1.1510/20. A break below 1.1500 has the potential to open up a move towards the 1.1360 level.
GBPUSD – yesterday’s failure to move back towards the 50-day MA at 1.3320 saw the pound slip back falling below 1.3100 and head back towards the recent June lows. A move below the 1.3040 level opens up the prospect of further weakness towards the 1.2980 area. We need to see a move back above 1.3320 to stabilise and suggest a retest of the 1.3500 area.
EURGBP – yesterday’s spike up to the 0.8915 area just about keeps the resistance barrier at the 0.8900 area intact. A sustained move through here opens up the March peaks at 0.8970. The bias remains for a retest of the lows last week, while below the 0.8900 area.
USDJPY – remains on course for the 113.75 area and December peaks. Only a move below the 112.20 area negates this scenario and argues for a move towards 111.20.
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