Equity markets have been running higher all of this week on expectations that interest rates are likely to remain low until well into next year, and nothing in this week’s economic data from either side of the Atlantic so far appears to have dissuaded investors from that belief.
Geopolitical concerns aside, the prospect of continued easy monetary policy from the Bank of England and the Federal Reserve, along with an expectation that the European Central Bank could well add to the punch bowl, has seen equity investors eschew concerns about inflation and slow growth in Europe, to push US markets back towards their all-time highs, and help continue the recent rebound in European markets.
That being said stock markets seem set for a pause this morning, with a slightly lower open, as we look ahead to the latest minutes from the Bank of England and the Federal Reserve.
Up until a week ago the contents of the latest Bank of England minutes were eagerly anticipated with expectations fairly high that we might have seen some dissent in the voting patterns with respect to a potential call for an increase in interest rates.
This seems much less likely now for a number of reasons, but the main one surrounds how dovish last week’s Bank of England inflation report was, which makes it harder to make that argument.
If there had been any significant dissent at the last meeting you would have thought that it would somehow have manifested itself within that report.
In any case given the weakness seen in both the average earnings data as well as yesterday’s sudden fall in the CPI inflation rate it is quite likely that today’s minutes are likely to be an anti-climax simply because they are stale, given how recent events have overtaken them.
It is therefore unlikely that we will see any form of split vote from the minutes today and even if we do the weakness seen in both the wages and the inflation data takes the pressure off the Bank having to even consider any prospect of a rate rise.
Let’s face it if you’re reluctant to raise rates when CPI is at 5% you’re hardly likely to do it when inflation is running below target, and has been doing so for seven months in succession.
The latest FOMC minutes from the 29th and 30th July meeting aren’t likely to provide too many surprises either, given that we already know that we have one dissenter in the form of the Philadelphia Fed’s Charles Plosser, though we might get some clarity on how the Fed is seeking to outline an exit strategy when the tapering program finishes in October.
We heard from another potential hawk, Dallas Fed chief Richard Fisher, just after the meeting saying that some on the committee were starting to move towards a more hawkish outlook, and it is here we might get some clarity on who those members might be, which might prompt a shift in sentiment, particularly if the markets perceive a shift in emphasis.
It should be noted though with oil prices falling inflationary pressures remain muted, a fact reinforced in yesterday’s CPI numbers for July.
Some in the markets may be anticipating some form of clues about potential policy shifts later in the week at Jackson Hole, when Fed Chair Janet Yellen is due to give a speech on measures to assess labour market slack. This seems unlikely and it is more likely that she will reiterate the Fed’s current policy stance of lower rates for longer, until wage pressures pick up and other labour market factors normalise.
EURUSD –having broken below the lows this month at 1.3333 we look to set to push towards the November 2013 lows at 1.3300, on the way towards 1.3220. Resistance remains at the highs this week just above 1.3410. A move through 1.3440 targets a move towards 1.3500.
GBPUSD – yesterday’s break and close below the 200 day MA at 1.6655 opens up a move towards 1.6520. Any pullbacks now look set to find resistance at the highs this week at 1.6740.
EURGBP – yesterday’s move back below the 0.8000 level found support at 0.7980 before rebounding strongly back through the 0.8000 level. The risk is that this move is merely another short squeeze before a move back lower. The 0.8000 level is likely to be the pivot with the highs last week at 0.8035 the main resistance.
USDJPY – edging back to the 103.00 area here but this remains the key resistance, while behind that we have the April highs at 104.10. We have support at 102.10 and 101.20.
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