European markets underwent a disappointing session yesterday after Fiat Chrysler and GM both cut their outlook and profit forecasts due to rising steel and aluminium costs as a result of the recent tariffs. Fiat Chrysler also missed on its Q2 profits and revenues on a day to forget as the company mourned the passing of its former CEO Sergio Marchionne.

While automakers remained under pressure US markets remained resilient against the backdrop of trade tensions getting a late pre-close lift on reports that the meeting between President Trump and EU officials had yielded some progress, though details were a little vague with reports of lower industrial tariffs and an agreement to import more US soybeans.

As a result, the S&P500 closed at its highest level since late January, when it hit an all-time high above 2,870, which should translate into a positive European open, despite Asia having a weak session.

The resulting press conference between President’s Trump and Juncker filled in some of the blanks with pledges to work towards zero tariffs on industrial goods, strengthen co-operation on energy particularly liquefied natural gas, along with a confirmation that the EU would import more US soybeans.

There was no mention of removing the existing retaliatory tariffs imposed in the last few months, and while the pledges to work towards zero tariffs is certainly a noble goal, it is likely to face significant obstacles from some national governments in Europe, which means it’s unlikely to ever happen. To get an idea of the obstacles you only need to look at the failure of TTIP.

On the plus side the prospect of 25% tariffs on European cars has receded for now, along with EU retaliation, which probably helps explain the positive market reaction.  

Earnings announcement also continued to come in thick and fast with Facebook finding that even though it beat on its headline numbers, revenues came in light at $13.23bn, while monthly and daily active users all came in lower than expected, though they were still 11% up year on year. You’d be hard pushed to suggest the Cambridge Analytica effect had an effect at all, yet the market reaction after hours was swift as the shares dropped sharply, by as much as 10%, after closing at a record high.

This may well be a case of investors setting too high a bar, but there is also the fact the shares are still up 36% from their April lows, and the warnings from management that revenue growth rates could well decline in the coming quarters, as margins compress. Tech shares could well start on the back foot again later today.

We’re not expecting any surprises from today’s ECB rate meeting coming as we do off the back off last month’s decision to taper the asset purchase program by the end of this year. The governing council also is unlikely to shift on its desire to end the program, despite some concerns about weaker data, with the focus now on when the first rate hike is likely to arrive.

At the last meeting there was a distinct element of constructive ambiguity about the timing with a lot of questions at the press conference about what constitutes “the end of the summer”. It is this type of ambiguity that the ECB revels in as it allows a big enough window to allow a little slippage if circumstances allow.

Currently markets are pricing October 2019 as the likely date for any move, and while some policymakers might feel a little uncomfortable about the timing being this far out, some of the more recent data does suggest that the economy is starting to decelerate, which in term would justify some caution on the part of the European Central Bank.

Any sharpening of the language to a more hawkish tone would be unwelcome at a time when inflation has just returned to target, but still looks a little on the softish side.

This would suggest that ECB President Mario Draghi will try and keep the statement and today’s press conference of the “copy and paste” variety in terms of tone to ensure that he keeps the euro currency within the 1.1500/1.2000 range it has largely been in since the end of April.

EURUSD – the failure to overcome the 1.1760 trend line resistance is likely to keep the euro under pressure in the short term. If we do get a move through 1.1760 we could well see 1.1850, with support at 1.1620.

GBPUSD – has moved through 1.3160 as we look to move towards the 1.3280 area on the back of last Friday’s bullish reversal. Support remains back down at the 1.3070 area and this week’s low.

EURGBP – has found support at the 0.8870 for now after this week’s slide from last week’s peak at 0.8970. We should now find resistance at the 0.8920 area with the risk we could see a move below 0.8870 and head back towards 0.8820.

USDJPY – could be set up for a break below trend line support at 110.70, but we also have support at the 200-day MA at 110.50 so must be cautious of a fake out.  We need to recover above the 111.70 area to retarget the 112.20 area.

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