US banks surged after they all passed the second round of the Federal Reserve’s stress test, and that allowed the finance houses to increase their capital returns to shareholders, in the form of higher dividends and stock repurchase programmes.

JPMorgan Chase, Citi Group, Wells Fargo, State Street and Morgan Stanley were quick to hike their dividends, and they helped the S&P 500 register its largest one-day gain in two months.

Due to the reforms brought in after the credit crisis, Fed chief Janet Yellen believes we will not see a repeat of a banking crisis in our lifetime. Ms Yellen optimistic in her outlook for the US economy ahead of the final growth domestic product numbers, released at 1.30pm (UK time). The consensus is for 1.2% growth.

The European Central Bank was forced to clarify its position, as the institution felt the financial markets misinterpreted Mario Draghi’s comments. The ECB president mentioned that reflationary forces had replaced deflationary ones, and dealers took it as a veiled signal the central bank would reconsider its very loose monetary policy. In fact, the ECB wanted the markets to know that its current policy was working well and it would remain in place for the foreseeable future.

Mr Draghi anticipates inflation to cool in the region over the next few years. Italy’s preliminary CPI report for June came in at 1.2%, and the market was expecting 1.3%, and that compares with May’s reading of 1.4%. At 1pm, Germany will release its June preliminary CPI report, and economists are expecting a reading of 1.4%, down from 1.5% in last year.

The ECB wasn’t the only central bank sending a clear message to the market. The Bank of England governor, Mark Carney, mentioned the possibility of removing some of the stimulus package. This is in stark contrast to his speech last week when he hinted that interest rates won’t be rising anytime soon. The weak pound is playing a role in the UK’s rising inflation, and if sterling picks up we could see inflationary pressure cool.

Brent Crude oil and WTI soared even though the Energy Information Agency (EIA) revealed that US oil inventories rose by 218,000 barrels, while the market was expecting a draw of 2.5 million barrels. The previous day, the American Petroleum Institute (API) showed that stockpiles increased by 851,000 barrels so traders were given a heads up that we could see an increase in inventories in the EIA report. US oil production on the week fell by 100,000 barrels per day to 9.3 million barrels per day. Last week, US oil production was 9.4 million barrels per day – its highest level since August 2015.  The dip in US production would have been a contributing factor to the squeeze higher in the price.

Looking at the bigger picture, demand for oil from major industrial economies like China and India is declining, and production from Nigeria and Libya is increasing, and this will continue to fuel the fears of over-supply in the oil market.

Forex snapshot

EUR/USD – yesterday the currency pair surged and support can be found at 1.1328. If the support at 1.1328 holds, the resistance at 1.1428 and 1.1495 will be the next prices to watch. A drop back below 1.1328 could see it return to 1.1300 and 1.1220.

GBP/USD – ran into resistance at 1.2977, a break above it would put 1.3047 on the radar. If it fails to clear the resistance at 1.2977, we could see it fall back to the 50-day moving average at 1.2863 and 1.2716 is the next support level.

EUR/GBP – 0.8770 is providing support and if the levels holds, bulls will be looking to 0.8820 and 0.8880. A break below 0.8770, would bring the support at 0.8738 into play.

USD/JPY – the 100-day moving average at 111.80 is acting as support, and bulls will be looking to the resistance at 112.46 and 113.00. A move below the 100-day moving average at 111.80 will put the 200-day moving average at 111.13 into sight, and 110.30 is the next support level.


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