Yesterday’s slide in equity markets was largely as a result of a slide in oil prices, which combined with a stronger US dollar prompted some light profit taking after several weeks of decent gains across most of Europe.
With all eyes on the annual Jackson Hole symposium which starts at the end of this week, the recent pause appears to have offered up the opportunity for some in the market to take a step back and lock in some profits.
We’ve also seen a rebound in the US dollar on the back of last weeks Fed minutes and new comments from Fed vice Chair Stanley Fischer, and his optimism about the resilience of the US economy. His comments that the US central bank was within striking distance of its employment and inflation targets, initially prompted a bit of additional US dollar strength, and while they have shifted the dial a little on rate hike expectations, there is a feeling that he appears to be largely talking to himself.
This is because the market has largely stopped taking notice of what Fed officials have had to say in recent weeks, having been led up the garden path on a number of occasions this year. That, and the fact it is currently fairly obvious that Fed officials remain divided about the timing of when rates are likely to rise, which means any decision in September still remains highly unlikely.
In Europe, the pound has continued to find support in the wake of last week’s better than expected economic data, while the reluctance of the euro to fall back towards its recent lows is starting to weigh on the DAX, as well as giving ECB President Mario Draghi a problem with respect to meeting the banks inflation target.
The reluctance of the Fed to raise rates is now starting to cause problems for its immediate peers, particularly the ECB and Bank of Japan, both of which have seen their currencies appreciate since they cut their rates into negative territory.
On the data front, inflation while showing some signs of stirring, still remains weak and having seen a Q2 growth slowdown in Germany and stagnation in France, there appears to be precious little evidence of a data pick up, thus far.
On the evidence of the data seen so far in Q3 there appears to be a certain element of the status quo in Germany, while there has been a modest improvement in France but it’s been fairly pitiful in terms of progress.
Today’s latest flash PMI’s for August for France and Germany in manufacturing and services are only likely to reinforce that, with French manufacturing likely to remain firmly in contraction at 48.8, with services set to remain unchanged at 50.5.
German economic activity is expected to remain fairly robust at 53.6 for manufacturing and 54.3 for services.
The latest US manufacturing flash PMI for August is also expected to weaken slightly to 52 7 from 52.9.
EURUSD – having moved beyond 1.1250 the next resistance sits at the June highs above the 1.1400 area. It seems likely that we will continue to remain range bound with only a move below the 1.1200 area arguing for a move back towards 1.1120.
GBPUSD – having seen a rebound to 1.3186 last week the pound needs to hold above 1.2970 to suggest we’ve seen a short term base at 1.2865. A move through 1.3200 has the potential to retarget the 1.3500 area.
EURGBP – having failed to push above the 0.8720 area last week we could drift back towards 0.8610 area. A break below 0.8600 could well signal a retest of the 0.8490 area. There is fairly solid between 0.8770 and the 2013 highs at 0.8815.
USDJPY – the US dollar continues to find it difficult to rally with the recent lows at 98.95 the main focus. The risk remains skewed for a move through these lows at 98.90, and potentially lower towards 95.00, and levels last seen in June 2013.
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