Yesterday’s European market session had all the hallmarks of watching paint dry, with little in the way of strong direction, with the FTSE 100 slipping back, while the DAX closed higher.
US markets on the other hand finished their session strongly higher, taking their cues from comments from US president Joe Biden expressing confidence that a deal would ultimately be agreed, confidence that was echoed by House Republican leader Kevin McCarthy. The gains were broad-based, with the Nasdaq 100 pushing up to the 13,600 level, retracing 50% of the declines from the November 2021 record highs. The S&P 500 also posted its strongest session since 5 May.
This week’s economic data has also offered hope that the US economy is withstanding higher rates much better than hoped, with the rise in yields reflecting the prospect that the Federal Reserve may well sneak in another rate hike in June. This change in mood has been reinforced further this week by Federal Reserve policymakers who have had a busy week, with many of them pushing back on the market narrative that indicated that interest rate cuts were likely well before the end of this year.
With very few exceptions the message has been much more hawkish than many had expected, pushing the US dollar to its highest levels since late March, while US 2-year yields have risen over 15bps since last Friday.
We’ve already heard from Federal Reserve governors Philip Jefferson and Michelle Bowman over the weekend, both of whom showed little inclination to offer encouragement to the doves. Jefferson expressed concern over the stickiness of core inflation, saying that progress here had been “discouraging”, while Michelle Bowman argued that there wasn’t enough evidence that inflation was coming down sustainably and she wanted to see more data before deciding whether a rate pause was justified.
Today we’ll get to hear more Fed speak, with Jefferson likely to reiterate his weekend comments, while we can also expect to hear from Governor Michael Barr, who is responsible for bank supervision and the Dallas Fed’s Lori Logan, with Fed chair Jerome Powell expected to speak tomorrow.
With yesterday’s strong US finish in mind, we look set to carry that momentum into today’s European open, although with bank holidays in France and Germany we can probably expect to see another quiet session. Today’s economic data docket is fairly lightweight in nature, with weekly jobless claims set to slip back from last week’s 264,000 to about 253,000. We also have the latest Philadelphia Fed business survey, which hopefully will be better than the Empire manufacturing survey from earlier this week, which was a bit of a shocker.
On the sterling front, the focus will be on Bank of England governor Andrew Bailey’s testimony to the UK parliament Treasury Select Committee, where he will outline to MPs how the MPC sees the prospects for the UK economy. One might hope that there won’t be too many popcorn moments, however if Bailey’s comments this week are any guide, anyone hoping for some humility on his part may well be waiting a long time.
Yesterday Bailey pushed back on criticism that the Bank of England was partly to blame for the fact that inflation was so high, due to overly loose monetary policy in the months leading up to the first hike, saying that no-one could have foreseen the impact of the Russian invasion of Ukraine. This of course overlooks the fact that the Bank of England started its rate-hiking cycle back in December 2021, when CPI was at 5.1% and over double the 2% target, and at 6.2% when the Russian tanks rolled over the border in March 2022.
By then the Bank had only hiked by 35bps, with the first hike in December a mere 15bps, which is the monetary equivalent of taking a knife to a gunfight. Who knows how things might have looked if they’d gone harder and quicker like the Federal Reserve has done. Unfortunately we shall never know what the counterfactual might have been, but to pretend that they didn’t make any mistakes is arrogant presumption at its worst.
EUR/USD – slipped back to 1.0810 and appears to be holding above 1.0800 for now. A break below 1.0800 targets 1.0760. Rebounds likely to find resistance at the 1.0940 area.
GBP/USD – a brief dip to 1.2425 proved short-lived yesterday. A sustained move below 1.2420/30 could signal further weakness towards the 1.2280 area in the short term, where we also have trend line support from the October lows. Resistance currently at 1.2540.
EUR/GBP – another failure just below the 0.8740 area and the 200-day SMA yesterday, although we are still holding above last week’s low at 0.8660 key support. A move below 0.8650 could see a move towards 0.8620.
USD/JPY – continues to edge higher and above the 200-day SMA at 137.00, with the March and May peaks at 137.80/90 also a key barrier. Above 138.00 could signal further gains towards 139.60.
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