With US markets closed yesterday European markets traded in a fairly narrow range, finishing mixed ahead as investors retreated to the sidelines ahead of the start of the latest round of Chinese and US tariffs. The tech sector proved to be the main drag after a Chinese court banned US chip maker Micron from selling chipsets in the country.
Asia markets continue to take the brunt of the damage with another negative session today, while markets in Europe have, so far proved much more resilient. That may well change in the coming days if escalation risks rise.
Away from the continuing background noise of trade tensions a lot of the economic data out yesterday was by and large fairly positive as the latest European June services PMIs broadly came in slightly better than expected, raising expectations that some of the weakness seen in recent economic data may well have bottomed out.
This certainly appears to be the case in the UK after the latest services PMI for June came in at a seven-month high of 55.1, making it a hat-trick of improvements following this week’s improvements in construction and manufacturing. The improvement also makes the case for an August rate rise from the Bank of England much more compelling, particularly in light of the strength of the data seen across the whole of Q2, though I’m sure the central bank will try and find another reason to avoid pulling the trigger, when they meet on August 2nd.
Bank of England governor Mark Carney is due to speak in Newcastle later this morning where the opportunity may arise for questions as to why, despite the central banks correct assumption that the weakness in Q1 was temporary, they appear to be so paralysed by indecision on a small 25 basis point move in rates. In the February inflation report the bank seemed intent on intending to pull the trigger on a hike only to step back after two months of weaker data. We’ve now had three months of fairly decent data which suggests that the economy may have grown 0.4% in Q2.
If as expected we get further evidence that May and June showed solid economic activity then it can reasonably be asked whether Mark Carney and his cohorts have any intention of delivering on a rate rise at all this year.
It’s also an important day for US data where we will be getting the latest snapshot of the US labour market with the latest ADP employment report, as well as the ISM services report for June. ADP payrolls are expected to add 190k new jobs in June while the latest ISM services update is expected to show another strong month of 58.3, down slightly from 58.6 in May.
We also have the latest Fed minutes where as expected the Federal Reserve raised rates by 25 basis points at its meeting last month. This was not a surprise given it had been well telegraphed and the decision was unanimous.
Markets were more concerned about the prospective glide path for further rate rises and in this context the outlook was positive. Policymakers did not resile from making the case for at least another two rate rises this year painting a bullish picture for growth and inflation and employment. The latest minutes should outline whether the Fed is concerned about an inflation overshoot and whether it has any concerns about the current uncertainty around trade which might derail these plans to raise rates another 5 times by the end of 2019.
EURUSD – the failure to push through the highs at 1.1720 keeps the pressure on the downside and a retest of the 1.1620 level. A move back below the 1.1600 area opens up a retest of the May lows at 1.1510/20. A break below 1.1500 has the potential to open up a move towards the 1.1360 level.
GBPUSD – continues to edge higher from last week’s low with the next target set at 1.3340. The lack of follow through on the downside appears to suggest we’ve seen a short-term base. A move back below 1.3170 argues for a return to the lows, while above 1.3350 argues for 1.3430.
EURGBP – the fall back below the 200-day MA after the failure at the 0.8900 area, keeps the pressure on the downside now we’re below the 0.8830 area. Next support comes in at the 0.8780 area with broader support at 0.8700.
USDJPY – this week’s failure above the 111.00 area keeps the US dollar range bound, with support back at the 109.70 area. A move through 111.20 targets 112.00. Support now comes in at the 109.70 and 109.20 area.
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