Last week proved to a week of divergences with European and US markets struggling for direction, with the DAX outperforming, despite a euro that managed to hit its highest levels in almost three years against the US dollar. It is becoming apparent that while investors aren’t showing too many nerves about an imminent market fall they are concerned enough to start hedging the prospect by pushing gold prices to their highest levels in a year.
There is also concern that while earnings have been much better than expected over the last couple of quarters, this could be as good as it gets unless we start to see some evidence of a pickup in wages as we look ahead to the end of the year.
Against a backdrop of concerns about North Korea which despite a quiet weekend, could escalate again today as the US goes back to the UN to try and push for a vote on further sanctions today, This prompted a predictably fiery rhetorical response from the North Koreans but little else as we get set for what looks set to be a positive start to the week, as shares in Asia pushed higher.
Investors will also be keen to assess the potential damage in the wake of Hurricane Irma as it continues to savage Florida with wind speeds of up to 150mph and storm surges of 15 feet. Coming so soon in the wake of Hurricane Harvey the costs are set to rise to the tens of billions of US dollars in the coming weeks and months.
Insurance companies, as well as reinsurers bore the brunt at the end of last week, and could well get an extra soaking this week if it becomes apparent that the bill might be larger than original estimates.
The resultant shock to the US economy in terms of potential GDP is likely to be difficult to gauge in both the short and longer term, with overall consumption likely to be hit in the short term, while in the longer term while we might see an uplift in economic terms in the context of rebuilding, this is unlikely to translate into a significant lift in terms of overall GDP.
This is probably why the US dollar could well remain under pressure in the coming days and weeks as it more than likely pushes the prospect of another US rate rise further out into 2018, particularly since the decision on the debt ceiling has been pushed out to the end of the year as well, thus deferring any political confrontation for now.
Another factor that could weigh on the US dollar is the wholesale changes that are set to take place at the top of the US central bank in the coming months, with as many as five places up for grabs, which means irrespective of what the dot plots said in July it is going to much harder to predict with any accuracy what they will look like at the beginning of next year, given the FOMC will look a lot different to how it does now.
As a result we could well see the US dollar index decline further, having closed below its 200 week MA for the first time since April 2014. US 10 year yields have also slipped below 2.1%, a move which could well see a decline back below 2% in the coming weeks for the first time since November last year.
It’s also set to be a big week for the pound with the release of the latest inflation and wages data, amidst concerns that the recent rise in inflation may yet deliver a final kick to the UK consumer. There is evidence that wage growth might well be starting to bottom out, which this week’s numbers might well corroborate further.
An improvement in wages could well add further weight to the arguments being made by the Bank of England MPC member Michael Saunders and his calls to reverse last year’s emergency rate cut.
EURUSD – the euro pushed above its previous peaks at 1.2070 to the 1.2090 level and looks set to close in on the 1.2170 area. This would be a 50% retracement of the 1.3995/1.0340 down move. A break here could open up the 1.2500 area. Support still comes in at 1.1980, and below that at 1.1910.
GBPUSD – has pushed beyond the 1.3140 area as it looks to close in on the August peaks at 1.3268, with larger resistance at 1.3320. Support now comes in at the 1.2980 area and below that at the 1.2850 area.
EURGBP – while below the 0.9220/30 area the risk of a move back to the 0.9040 area and the 50 day MA remains.
USDJPY – with the 108.20 area giving way towards the 106.80 area has now opened up. A move back through the 108.50 area stabilises and opens up the prospect of a move back towards the 111.00 area.
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