European and US equities ended last week on a negative note, after enjoying a bullish run prior to Friday.
Last Tuesday, Mario Draghi, the head of the European Central Bank (ECB), got his oar in ahead of the Federal Reserve, and suggested that monetary policy could be looser. There was chatter of a reduction in interest rates, and the possibility of restarting of the bond buying scheme.
The announcement from Mr Draghi propped up European equity markets nicely, and seems that the central banker wanted to talk down the euro ahead of the Fed meeting on Wednesday. Jerome Powell, the head of the US central bank, dropped big hints that rate reductions could come into play later this year, and that assisted European and US equity markets through Wednesday and Thursday. The Friday session was tame as equities largely edged lower.
Now that the Fed meeting is out of the way, traders are already looking to the back end of this week, where President Trump will meet China’s Xi Jinping. Even though the language between the two sides has mellowed, the relationship is far from fixed, and dealers might approach the G20 summit with some caution.
Stocks in Asia made small gains overnight as trade talks between the US and China are in focus.
On Friday we saw some mediocre data from the US. The manufacturing PMI report and the services PMI report came in at 50.1 and 50.7 respectively. The updates show minimal growth in the sectors. The manufacturing reading was the weakest in over nine years, and the services PMI update was the lowest in over three years. Traders can’t ignore the fact that some elements of the US economy are slowing. On the bright side, existing home sales jumped by 2.5%, topping forecasts.
The greenback has taken a battering recently as the Fed delivered the dovish update that dealers were expected. Traders were selling the US dollar in the belief that interest rates in the US will decline later this year. The weakened greenback acted as fuel for gold’s rally, which hit a level last seen in August 2013.
For a change, the eurozone posted some encouraging figures. The French and German PMI reports for the services and manufacturing sectors all showed growth on the month, and the readings exceeded forecasts. The German manufacturing sector is still in contraction territory, and this remains worrying. Global trade tensions and the lack of clarity in relation to Brexit appears to be hanging over the German manufacturing industry.
The Tory leadership race has been whittled down to Boris Johnson and Jeremey Hunt. Boris continues to be the bookmarkers favourite despite his domestic issues over the weekend. Some quarters of the Conservative party membership dislike Mr Johnson, but given what happened Theresa May, Tory members are unlikely to back Mr Hunt, who voted ‘Remain’ in 2016.
Last week, President Trump showed some restraint with regard Iran. A US drone was downed by the regime, and Mr Trump was quick to describe the move as a ‘big mistake’. Given that no US military personnel were involved in the incident, the US president said he was in no hurry to attack. Oil surged on the back of the heightened tensions, and volatility is likely to remain high, as ‘significant sanctions’ will be imposed on Iran – according to Mike Pompeo, US secretary of state.
German Ifo business climate will be released at 9am (UK time), and economists are expecting the reading to slip to 97.3 from 97.9.
EUR/USD – has been largely pushing higher since late May, and a break above 1.1400 might bring 1.1448 into play. A move back below 1.1200 might pave the way for the 1.1110 area to be retested.
GBP/USD – has been driving lower since mid-March, and if the bearish move continues it might encounter support at 1.2476 region. The 1.2800 area might act as resistance.
EUR/GBP – has rebounded for over one month, and if it holds above 0.8800, it might bring 0.9000 into play. A move to the downside might bring the 200-day moving average at 0.8780 into play.
USD/JPY – has been in a down trend since late April, and if the bearish move continues it might target the 106.00 mark. Resistance might be found at the 50-day moving average at 109.90.