European markets enjoyed a strong session yesterday, largely as a result of comments by ECB policymaker Benoit Coeure that pointed to concern about the recent bond market sell-off, as he announced that the central bank would be front loading its easing program, due to concerns about potential low levels of liquidity in the forthcoming summer months. Some of that heat looks set to tail off a little today with a lower open ahead of the latest Bank of England and Fed minutes. Yesterday’s comments do invite the cynical view that European policymakers are concerned about the recent rebound in the euro at a time when US economic data is starting to tail off, which is bringing forth downward pressure to bear on the US dollar. It seems that while the ECB claims that the exchange rate isn’t a policy target, the jump in yields, as a result of the recent bond sell-off has prompted some concern that the rebound in the euro could well hinder the progress made in putting a floor under falling prices. Yesterday’s EU CPI number was the first time this year that inflation wasn’t in negative territory, and it appears that the ECB is determined to keep it that way. While US economic data was beating expectations that didn’t appear to be too much of a problem, but now expectations in the US are shifting around the timing of a possible US rate rise, and today’s FOMC minutes could well shed some light on policymakers thinking in this regard. The biggest problem from the markets point of view is that these minutes from the April 28th/29th meeting are likely to be somewhat stale. A number of Fed policymakers continue to make optimistic noises about a recovery in Q2, after the weak Q1 data, but we’ve seen scant evidence of it thus far, while Chicago Fed chief Charles Evans has been particularly vocal this week about waiting until Q1 next year before raising rates, a message he is likely to repeat at the European market open this morning, when he makes a speech in Munich. Even though the payrolls data that we saw this month was satisfactory, the significant downward revisions to the total jobs added in Q1, suggests that the jobs miracle of 2014 has started to run out of steam. When you also throw in weak industrial production, retail sales and manufacturing data for April, it rather begs the question when we can expect to see the much anticipated rebound. The tone will be particularly important given the downgrades to the growth and inflation forecasts seen in March, particularly in the context of timing expectations, of when a hike might occur. If the minutes are dovish even before the data we’ve seen this month, then it is reasonable to assume that policymakers are likely to be even more dovish now. Also on the agenda today are the latest minutes from the most recent Bank of England meeting, which shouldn’t offer up too many surprises given last week’s quarterly inflation report probably already covered most of the detail. Yesterday’s slide into negative territory for April CPI wasn’t too much of a surprise given it was flagged as a possibility last week, and given the slide in the oil price last summer was pretty much expected to happen from as far back as the beginning of this year in any case. The biggest surprise from the previous minutes in March was the revelation that one member, Andrew Haldane, suggested the next move in rates could be lower, and not higher, which might suggest the beginnings of a significant shift. It will be interesting to note whether there is a shift towards that view by other policymakers on the committee, given some of the weakness in the recent data in the lead up to this month’s election. EURUSD – yesterday slide in the euro could well see us fall all the way back to the 1.1050 level without undermining the current rebound from the recent lows. Only a fall below the 1.1050 level negates the current upward momentum for a move towards 1.2000. GBPUSD – after the double failure above 1.5800 and have dropped back below the 200 day MA at 1.5600, setting us up for test of the trend line support at 1.5460, from the lows in April. The speed of the decline is worrying and a break below 1.5420 could well see further losses towards 1.5000. EURGBP – the euro appears to be trading in a range for now with resistance just below the 0.7300 level and strong support down near the lows last week at 0.7115. USDJPY – we’ve seen the US dollar pull back to the resistance level at the 120.70/80 level. The April highs at 120.85 are the next obstacle to a retest of the highs at 122.00. We also need to be aware of trend line resistance at 122.15 from the 1990 highs at 160.30. Support remains near the recent range lows between 118.30 and 118.65. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
Lower open for Europe ahead of Bank of England and Fed minutes.
20:00, 19 May 2015