The last three months have been quite a contrast between markets in Europe and those in the US. While US markets have continued to make new record highs on an almost weekly basis since then the performance of Europe’s key benchmark indices has been disappointing and it would appear that the turning point was the confirmation of Emmanuel Macron as President of France.

Since that day in May the direction for European equities has been mostly one way, down, and while the German DAX did briefly post a new record high in June, we’ve seen two successive months of losses for the EuroStoxx50, while the post Macron bounce in the CAC40 has disappeared completely.

This divergence is hard to square with the fact that the economic data since May has been overwhelmingly positive, with economic activity at multi year highs with unemployment back at pre crisis levels of 9.2%, with this morning’s manufacturing PMI’s expected to reinforce recent momentum.

July manufacturing PMI for Spain, Italy, France and Germany are all expected to come in at 54.9, 55.2, 55.4 and 58.3 respectively, all either better than or equal to the June numbers, and it is here that we can start to see an explanation as to why equity markets in Germany and France are now under pressure.

The latest EU Q2 GDP is expected to show expansion of 0.6% and 2.1% on annualised basis, and it is this that is prompting speculation that the ECB may well look at cutting back on its very easy monetary stimulus program, which in turn has pushed the euro higher.

The recovery in the euro from 1.1000 to above 1.1800, a rise of 8% over this period, is likely to make a significant dent into the revenues of those companies who generate a lot of their income from exports.  There is also the fact that for all the euphoria of Emmanuel Macron’s coronation as French President, it appears that the same old protectionist tendencies still appear to be prevailing given the recent spat with Italy over Fincantieri and the nationalisation of the STX shipyard.

It would appear that the Emperor’s new clothes look a lot like the old ones and that now the rose tinted glasses have fallen away, there are unlikely to be any quick wins for the French economy.

Despite this we look set for a positive open as we start the new month after Caixin manufacturing PMI for China came in better than expected overnight, which coming on the back of yesterday’s positive Chinese numbers has given Asia markets a boost. The Reserve Bank of Australia also kept rates unchanged at a record low of 1.5% while broadly speaking keeping the economic outlook unchanged.

In the UK we’ve seen economic activity become a little more moderate this year, nonetheless it still remains positive as Q3 gets under way. July manufacturing PMI is expected to come in at 54.5, an improvement on June’s 54.3.

This economic improvement has helped the pound rise to a ten month high against the US dollar, though this only remains part of the story, with the recent weakness in the greenback also giving a lift to the euro and giving both the ECB and the Bank of England an unwelcome problem.

At a time when the pressure is on both to start normalising monetary policy, a rising currency is likely to push down on inflation, and while that is welcome for consumers, it’s not so good for exporters, making raising rates slightly more problematic.

This lack of inflation has also been a problem for the US Federal Reserve though the recent decline in the greenback may help in that regard in the longer term. For now it isn’t and if today’s PCE data for June, which is the Fed’s preferred inflation measure, remains anchored at 1.4% the prospect of any sort of rate rise this year is likely to get priced out even further.

EURUSD – has pushed above the 200 week MA at 1.1795, and now needs to close the week above here to argue for a move towards the 1.2000 level. Support remains back at the 1.1610 level, and below that at the 1.1480 area. Only a break below the 1.1480 area opens up a pullback towards the 1.1300 area.

GBPUSD – the pound continues to push higher towards the 1.3310 level edging above 1.3200 and a new 10 month high. Still has support just above the 1.3000 level, with only a drop below potential opening up a retest of the 1.2900 level. A move below 1.2900 opens up the 1.2700 area.

EURGBP – currently managing to hold above the 0.8870 area and while we do so a move back to the 0.9000 level remains a possibility, with a break above targeting the 0.9300 area. A break below 0.8870 would delay this and open up a move back to the 0.8780 area.

USDJPY – still edging lower with the potential to head towards the 109.80 area. We need to see a move back above the 110.80 area to stabilise and push back towards 111.30, as well as the 112.30 area.

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