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Europe set for higher open, in key week for Fed, and Bank of England

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Despite both Amazon and Apple missing expectations on their latest quarterly numbers, US markets still managed to close out the month of October with their best monthly gain this year, as well as managing to finish the week at record closing highs.

European markets also finished the week, and the month higher, despite finishing the week on the back foot, with the FTSE100 posting its best weekly close in 20 months.

As we look ahead to the first week of November, there are still concerns about the economy in China after the latest manufacturing and services PMI showed further weakness in October.  

The resilience in the markets is all the more surprising given the amount of gloomy headlines about rising inflationary pressures, the impact of supply chain disruptions, and their prospective impact on company profit margins and consumer disposable incomes.

Under normal circumstances this would certainly be a problem at a time when central banks appear to be getting ready to scale back their large-scale stimulus programs in response to the recent sharp rise in inflation expectations, with all eyes on this weeks RBA, Federal Reserve and Bank of England rate meetings, with all three expected to alter their policy settings to some degree, either this week, or before the end of the year.

Company results have thus far been fairly positive, and particularly encouragingly we’ve seen companies have been able to pass on price rises to consumers without any hint of demand destruction. One big reason for this consumer resilience is likely to have been that the large governmental fiscal responses have proved to be a decent buffer for consumer balance sheets, as prices rise. 

Whether that remains to be the case is open to question, however the fact that unemployment is almost back close to levels it was pre-pandemic is welcome news for governments who were concerned about the widespread damage the pandemic might have done to the jobs market.

In the US continuing claims are now down at 2.2m, levels last seen at the beginning of 2016, and only 500k higher than they were prior to the March 2020 lockdown, when they were averaging 1.7m.

As we look ahead to today’s market open, we can expect to see a positive start to the week, after the Nikkei 225 got off to a flier after a decisive win for the ruling Liberal Democrats, who retained their majority in the weekend elections, and as we look to the latest economic announcements in the form of manufacturing PMI numbers from the UK and US which are expected to remain fairly resilient.

The UK numbers are expected to be confirmed at 57.7, while the latest US ISM manufacturing numbers, which pushed back above 60 in September, look set to stay there in the October numbers, coming in at 60.4, however prices paid, which have come down in recent weeks could edge up again to 82.5, from 81.2.

The European PMI numbers are due out tomorrow due to a holiday in France and Italy, while US markets are set to open at 13:30pm due to US clocks not going back until next weekend.  

EUR/USD – slid back from the 50-day MA and 1.1700 area which looks set to be a key resistance if we are to break out of the current downtrend. Slid back below 1.1620 and look set for a retest of the October lows at 1.1520, and potentially the 1.1460 area.

GBP/USD – slid below the 50-day MA at 1.3720, and has tested support at the 1.3670 area. A move through 1.3670 opens up the potential for a move towards 1.3570. We need to see a move back above 1.3730 to stabilise.

EUR/GBP – last week’s failure below the 0.8400 area saw the euro squeeze back higher but has so far been unable to move through the 0.8480 area.  A break below the 0.8400 area targets the 0.8280 level. We need to break above the 0.8480 level to target the 0.8520 area.   

USD/JPY – finding support at the 113.20 area. The November 2017 peak at 114.75, remains the key resistance. The 113.20 area is the next key support, followed by the 112.40 area. 

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