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Next steps in Catalonia eyed by investors

Both US and European markets finished last week on the front foot after US Q3 GDP came in ahead of expectations, while a weaker euro helped underpin the continued resilience in European markets after last week’s ECB press monetary policy decision and press conference.

US markets were boosted by a combination of improving economic data, which appeared to show little disruption as a result of the recent hurricanes, and a series of bumper earnings updates, while European markets, with the exception of Spain continued to make decent gains with the DAX making new record highs, while the French CAC40 hit its highest levels since 2007, on a similarly positive economic backdrop.

Having spent most of this year looking pretty robust the euro has undergone a slight change of fortune and now suddenly has the appearance of a currency suddenly under pressure, as traders investors digest events in Spain, which caused the Spanish stock market to drop sharply, as well as the fact that for all the anticipation of last week’s ECB taper, monetary policy is still likely to remain very loose, particularly since the bank will be reinvesting any assets that are due to roll-off in the coming months.

The US dollar is also likely to continue to remain fairly strong in the coming weeks as investors look to where the next rate hike is likely to come from once the December one is out of the way.

Speculation continues to grow that current Fed board member Jerome Powell is the current favourite to replace Janet Yellen as Fed chief and is regarded as probably the most dovish of the candidates, however if economic data continues to improve at its current rate, and in spite of the recent hurricane, it probably won’t matter who becomes the next Fed chief, as the markets will price in prospective rate rises all by themselves.

Events in Catalonia are likely to take centre stage early on this week after developments over the weekend. The triggering of article 155 by Madrid in response to the declaration of independence by the Catalonian parliament has not only split Catalonia but it has also made Prime Minister Rajoy’s own position much more precarious, given some unease amongst some members of the Spanish parliament, particularly the Basques.

This may help explain why in dissolving all of the Catalan institutions and the calling of quick elections, suggests that the Madrid government wants to try and lance this boil quickly in the hope that new elections return an administration that is less pro-independence, and more representative of the anti-secession demonstrations seen over the weekend.

It’s a risky strategy given that the unsavoury events from the beginning of October are still fresh in the memory.

The bigger immediate question is whether government officials in Catalonia conform and recognise the directives now being issued from Madrid, when they return to work this morning.

Later this morning we could get an early indication as to how all this uncertainty in Catalonia has affected the Spanish economy with the latest flash GDP number for Q3, with estimates expecting only a modest slowdown from 0.9% to 0.8%, however given the size of Catalonia’s economy, about 20% of Spanish GDP recent events are likely to act as a significant drag as we head into year end.

In the UK we get the latest lending data for September with consumer credit still expected to remain fairly well robust at £1.5bn, down from £1.6bn. Mortgage approvals are also expected to slow slightly to 66k, from 66k in August.  

EURUSD – the break below the recent lows at 1.1670 opens up the prospect of a move towards 1.1230, completing a head and shoulders top reversal. Initial target is a move towards 1.1390 while any pullbacks need to overcome the 1.1680 level to suggest reversal.

GBPUSD – slipped back towards the 100 day MA at 1.3065, before rebounding, and needs to stay above here as well as trend line support from the March lows which comes in at the 1.3030 area to keep the upside momentum intact. We need a move back above the 1.3340 area to retarget the 1.3420 area. 

EURGBP – found support at 0.8825 last week trend line support from the November 2015 lows. A break below here opens up a test of the 200 day MA at 0.8755. We need to recover back above the 0.8870 level to argue for a return to the 0.8920 area.  

USDJPY – last week’s failure at the 114.40 level keeps the current range intact, with a break targeting the 115.60 area. Support comes in at the 113.20 area and last week’s low, with a break retargeting the 112.40 area.

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