Stock markets in Europe finished lower yesterday as traders viewed no new as bad news, and started to cash in their long positions and book the profits from last week’s gains.
It was a quiet day in terms of news, and seeing as Chinese, American and Canadian markets were closed, dealers in Europe exited the market as an absence of major news and low trading volumes prompted them to unwind their positions in stocks.
In early trading, indices like the FTSE, DAX and CAC 40 all reached levels not seen for at least 10 day, which suggests there was some optimism in the session. The herd mentality is always evident in the wake of a major sell-off as individuals like to feel they are part of the pack, but when the equity benchmarks turned red, the same old fears kicked in again.
The German PPI will be released at 7am (UK time), and the consensus is for a reading of 1.9%, down from 2.3% in the previous report. It is slightly worrying, as that is a sizeable decline economists are expecting. Headline inflation has already slipped back to 1.6% from 1.7%, and if input costs in manufacturing are expected to weaken, we could see further weakness in CPI. It is odd how the German manufacturing and services sectors are so strong, while the cost of living is sliding. If demand is soft in German, it doesn’t bode well for the eurozone’s inflation reading – which is due out on Friday.
The euro has enjoyed a positive run recently on account of the strong economic data from the currency bloc, but the CPI continues to lag. Mario Draghi, the head of the European Central Bank (ECB) has consistently left the door open to extra or extended monetary easing if inflation fails to pick up. It is no secret that Mr Draghi would like a weaker euro, and he is likely to try and talk the currency down at the next available chance. Sooner or later the robust euro is going to take its toll on the eurozone, unless prices in the region continue to drag.
The relative strength of the euro and the pound are holding back the eurozone equity markets and the Biritish indices, compared with the Dow Jones and S&P 500 – which are getting a nice boost from the soft US dollar. The US dollar index fell to a new threw year low at the back end of last week, and since the euro accounts for approximately half of that basket, the movement of the single currency could have a big impact of equity markets on both sides of the Atlantic.
EUR/USD – has been pushing higher since November and if the positive run continues it could target 1.2600 or 1.2700. Moves lower may find support at 1.2330 or 1.2200.
GBP/USD – is still in the upward trend that it has been in since March, and resistance may be encountered at 1.4400. Pullbacks might find support at 1.3900.
EUR/GBP – has been range bound since December and is nearing the top end of the range at 0.8929, and break above it could bring 0.9000 into play. Support could come into play at 0.8800.
USD/JPY – has been in decline since November, and it could target 105.53 or 104.00. A bounce back might run into resistance at 106.85 or 107.32.
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