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Positive start expected for Europe, pound in focus

US equity markets finished on a positive note on Friday as traders focused on the respectable non-farm payrolls report. 

All things considered, it was a pretty good report – there was nothing outstanding but the figures were solid. The headline figure was 157,000, against the 190,000 consensus estimate. The unemployment rate fell to 3.9%, and the average earnings on a yearly basis held steady at 2.7%. The labour market isn’t storming it, but it is ticking along nicely.

Dealers shrugged off the news that China outlined plans to slap tariffs on $60 billion worth of US imports. Over the weekend, President Trump claimed the US is winning the trade war against China, pointing to the decline in the Chinese stock market – which has been overtaken by Japan’s as the second-largest in the world. Mr Trump loves to win, and if he feels he has the edge over China, he is likely to keep the pressure on Beijing.

Sterling had a bumpy ride last week in light of the Bank of England’s (BoE) unanimous decision to hike interest rates – the first hike since the credit crisis. On Friday, Mark Carney, the BoE chief, hinted at one rate hike per year for the next few years, but also warned about the possibility of a no-deal Brexit. Given the robust economic activity in the UK in recent months, and the hiking cycle that the Federal Reserve are in, a 0.25% hike from the BoE seemed appropriate. It was odd that Mr Carney would hike rates on one day, and then talk the pound down the following day. The recent weakness in sterling could keep inflation a little on the high side.

The pound is likely to be in focus today as Liam Fox, Secretary for International Trade, announced the probability of a no-deal Brexit is 60-40. Mr Fox blamed the EU for the lack of progress on the negotiations. It is possible that Mr Fox is taking a leaf out of Mr Trump’s book and talking tough, but nonetheless, the prospect of no deal being reached is likely to put pressure on the pound.

Today is likely to be a quiet day in terms of economic indicators. At 7am (UK time), Germany will release the latest factory orders report, and economists are anticipating a 0.2% decline, and that compares with a 2.6% rise in May. The latest German manufacturing and services reports weren’t overly impressive, and this is a bit of a worry seeing as Germany is the powerhouse of Europe. The eurozone Sentix investor confidence report will be released at 9.30am (UK time) and traders are expecting the reading to be 12.8, which would be an improvement on July’s 12.1. It is worth noting the June figure was 9.3 – the lowest reading since late 2016. In the grand scheme of things, investment sentiment is weak.

EUR/USD – remains below the trend line from the June high, and while it remains below the 1.1720 area its outlook could remain negative. A break below the 1.1510 area, might bring about further losses. A move back above 1.1720, could bring 1.1850 into play. 

GBP/USD – has been in a downtrend since April, and if there is a break below 1.2957, it might pave the way for further losses. Pullbacks might run into resistance at 1.3219 – 50-day moving average, or 1.3363.      

EUR/GBP – has been pushing higher since April and if the bullish run continues it could target 0.8970. A move lower might find support at 0.8844 or at 0.8818 – 200-day moving average.

USD/JPY – the upward trend that began in March is still intact, and if the positive move continues it might target 113.18. Support might be found at 110.71 – 50-day moving average, or at 110.04 – the 200-day moving average.

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