US markets saw more new records yesterday with the Dow outperforming the S&P500 and Nasdaq, though we still managed record closes for the former two, with the Nasdaq slipping back slightly, after the US dollar bounced back from new three year lows in the wake of comments from US President Trump.
European markets found progress much more difficult, undermined by a euro that briefly traded above 1.2500 for the first time since December 2014. The FTSE100 also slid back sharply closing at its lowest level this year as the pound briefly traded above 1.4300, its highest level since June 2016 in the wake of the Brexit vote.
Having seen the US dollar index hit a fresh three year low yesterday, currency traders underwent a significant case of whiplash in the wake of ECB President Mario Draghi’s press conference. The ECB President painted an optimistic outlook for the economy in Europe but his failure to try and talk the euro lower encouraged traders to push the euro even higher, sending it above 1.2500 and its highest level since December 2014.
Draghi may well have surmised that given recent economic data it would have been pointless to even try to do so given recent comments from US Treasury Secretary Mnuchin, about a weaker US dollar being good for trade.
The ECB President did take aim at the US Treasury Secretary for these comments, expressing the view that “recent comments by someone else”, not the ECB, didn’t conform to the agreed terms of references with respect to movement in exchange rates.
At about the same time as Draghi was speaking President Trump was arriving in Davos and a few hours later he rowed back on Mnuchin’s ambivalent comments about the recent weakness in the US dollar by saying that he wanted to see a US dollar that was strong, which stopped yesterday’s sell off in its tracks.
While President Trump’s comments prompted a short covering rally in the US dollar, they won’t have alleviated investors separate concerns about recent belligerent US rhetoric on trade. Nonetheless as we head into the weekend US dollar short positions could well get squeezed given the scale of recent losses.
Today’s speech by the US President in Davos might also be a market mover, with some talk that some delegates might be planning a boycott over his recent reported remarks about African countries. Nonetheless the speech will be important in the context of whether this week’s implementation of US tariffs on steel and washing machines are merely the opening gambit in a new confrontational approach around trade, or merely a ploy to generate a different approach to trade relationships.
On the data front it’s an important day for initial iterations of Q4 GDP for the UK and US economies. Starting with the UK we’ll get to see an initial snapshot of how strongly the UK economy finished off 2017.
Initial indications are expected to show that the UK economy grew 0.4% in Q4 with services expected to contribute most of the expansion, though manufacturing is also expected to put in a decent performance.
In the US we will also be getting the first iteration of Q4 GDP with only a modest slow down expected from the strong numbers seen in Q3. A slight moderation from an annualised 3.2% to 3% is predicted.
We also have December durable goods orders which are expected to show a rise of 0.9%, down slightly from 1.3% in November.
EURUSD – the euro pushed up to 1.2540 yesterday failing shy of the 1.2600 area and 61.8% retracement level of the 1.3995/1.0340 down move. As long as we stay above 1.2320 the current up move should remain intact, while only a move below 1.2160 would delay it completely.
GBPUSD – topped out at 1.4345 yesterday before drifting back quite sharply and finding support at the 1.4080 area. Only a move below 1.4030 would suggest that a top is in and a fall back to the 1.3850 area. The 1.4590 area and 50% retracement of the 1.7190/1.1950 down move remains a possibility, while above 1.4000.
EURGBP – found support at the previous lows in December at 0.8690 and rebounded strongly. We could well see a retest of the 0.8800 level, but while below here downside risk remains intact. Above 0.8800 retargets 0.8850.
USDJPY – found support at 108.50 yesterday but needs to move back above the 110.10 area to stabilise. This would then suggest a retest of the 111.00 area.
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