US markets took another leg higher yesterday in the wake of the announcement that the US government shutdown that started at the weekend wouldn’t be lasting very long, which in turn means that any potential negative effect on the US economy is likely to be minimal at worst.
The announcement that US senators had arrived at a stop-gap deal to fund the government until 8 February saw US markets, which had been trading slightly negative to flat, push up further to close at another set of record highs.
A set of positive upgrades for global growth from the IMF had already set the scene for a positive day before that in any case, as they cited the impact of the recent tax cut legislation in pushing up their estimates for the next two years by 0.2%, to 3.9%.
The US dollar index which has been struggling for several weeks initially popped higher on the news of the stop gap deal, but soon gave back ground again, though it continues to hold above its recent lows at 90.00 against a basket of currencies.
While the US dollar was able to hold its own against the Japanese yen and to some extent against the euro, it continued to lose ground against the pound, with another post Brexit peak near $1.4000, on optimism that the UK might be able to get its wish of some form of bespoke Brexit deal in the coming months, after weekend remarks from President Macron of France that some form of unique solution might well be possible.
It’s set to be another important week for the UK economy despite another growth downgrade from the IMF to its GDP forecast for 2018 and 2019 to 1.5%, despite upgrading its forecasts elsewhere. While that is disappointing the IMF doesn’t have a particularly great track record when it comes to forecasting with respect to the UK economy, from its “playing with fire” comments when George Osborne was UK chancellor in 2013, to its mutterings of doom and gloom prior to the 2016 Brexit vote.
Today’s public sector borrowing numbers for December are expected to fall from £8.1bn in November to £4.2bn in December as the current Chancellor looks to stay on target with respect to this year’s borrowing targets.
We’ll also get to see the latest CBI surveys on business optimism and industrial orders with particular attention likely to be on the business optimism number which was a disappointing -11 at its last reading. The manufacturing sector has been a significant outperformer in recent months and it would be disappointing if the survey didn’t reflect that.
The political situation in Germany continues to remain fairly fluid despite the agreement between the SPD and Angela Merkel to start coalition talks, a fact that may weigh on the latest ZEW sentiment indicators which have remained fairly constant over the last few months. While it is welcome that talks have started the SPD remains bitterly divided on the wisdom of entering another coalition deal.
This would suggest that the talks are likely to drag on and could well falter it the SPD membership are unable to agree with a big enough majority.
Despite that European markets look set to open higher today after yesterday’s record US close with the German DAX potentially set to open at or near a new record level.
The Bank of Japan left its monetary policy unchanged in Asia trading earlier today, with attention likely to be on Governor Kuroda’s press conference later today after the recent tweak to its monthly bond buying program earlier this month.
This move surprised a lot of investors which had taken the Bank of Japan for granted with respect to its easing program, In that context markets will be paying close attention to how guides future expectations of policy moves later on into this year, with respect to whether we can expect further moves as well as the outlook for inflation, and the Japanese economy.
EUR/USD – continues to struggle below 1.2300, but is still finding support above the 1.2160/70 level and while it does so the bias remains for a move towards the 1.2600 area and 61.8% retracement level of the 1.3995/1.0340 down move, on a move through the 1.2300 level. Below 1.2160 argues for 1.2090.
GBP/USD – now pushing up against the 1 4000 level with a concerted break of this 38.2% retracement of the 1.7190/1.1950 down move opening up a possible test of 1.4590 which is the 50% level. Support comes in at last week’s low at 1.3725 and the 1.3650 area.
EUR/GBP – has slipped below the 0.8800 area which now opens up the prospect of a move to the previous lows at 0.8735, from the latter part of last year. We need to see a close below 0.8700 to open a move down towards 0.8650. Resistance now comes in at the 0.8800 level and above that at the 100 day MA and 0.8910.
USD/JPY – currently in a range with support at the 110.10 area last week. We need to move above the 111.50 area to retarget the 112.00 area, or face the prospect of a move towards 109.50.
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