Once again we’ve seen US markets make new record highs this time after positive results from global industrial bellwether Caterpillar as sales of industrial equipment in China and North America helped revenues rise 24% from a year ago, and well above expectations.
European markets traded much more indifferently with the FTSE100 unable to benefit significantly from yesterday’s weakening pound, while the rest of Europe was only able to post modest gains.
The pound’s weakness was primarily a result of jitters about the prospect of there not being a rate hike next week. Reiterating his remarks from Monday, Bank of England deputy governor Jon Cunliffe threw more shade than light on the prospects for a rise in interest rates at next week’s Bank of England rate meeting and inflation report. His comments that a rate move remains an open question are in recent contrast to market expectations of a move next week, which are still priced at over 80%.
This is becoming dangerous ground for the Bank of England, having misled markets consistently over the last few years with respect to their confused guidance, the bank runs the risk of eroding its credibility further with the mixed messages currently emanating from its various policymakers.
When external MPC member Gertjan Vlieghe recently joined the ranks suggesting a modest move on rates might be sensible in light of recent inflationary pressures, there appeared to be an acknowledgement that with other central banks looking to retreat modestly from their own loose policies, that a similar move by the Bank of England might be prudent, if only to keep a lid on the current rise being seen in the inflation outlook.
It is true that policymakers are being urged to hold back in case of a policy mistake in the manner of the European Central Bank back in 2011, with a majority of economists saying that now is not the right time to be raising rates, while at the same time acknowledging that the bank probably will raise rates next week.
The risk is that with rates already rock at bottom and the move already priced in, if the bank were to pull back now the resulting reaction could well be as equally damaging, not only for the central banks credibility, but also for the pound.
In any case I’m not sure that following the advice of the very same people who urged last year’s stimulus package is probably the wisest course of action given how economically damaging last year’s move has turned out to be in terms of rising prices.
Next week’s decision looks increasingly likely to be a split decision, however it would be a big surprise if the bank decided to pull back from a rate move at this late stage, particularly since today’s first iteration of Q3 GDP is expected to show that the economy grew at 0.3%. Index of services is expected to contribute 0.4% to that number on a quarterly basis, while manufacturing is also expected to put in a strong showing if recent private survey is anywhere near an accurate guide.
Yesterday the latest PMI numbers from France and Germany showed that France continued to outperform its bigger neighbour with the prospect that France could well be the best performing European economy this year in Q4.
Today’s German IFO business climate number is expected to show that business confidence remains high in October with a modest slowdown from 115.2 in September to 115.1.
EURUSD – currently range trading between resistance at the 1.1870 level and support above the recent lows at the 1.1670 area. A move below 1.1720 has the potential to open up these lows.
GBPUSD – remains vulnerable to a slide below last week’s low at 1.3090 with the potential for a move towards the 100 day MA at 1.3050, and trend line support from the March lows. We need a move back the 1.3340 area to retarget the 1.3420 area.
EURGBP – appears to be finding some support above the 0.8870 area after last week’s failure above the 0.9000 and the 50 day MA. While above the 0.8870 level we could move back towards the 50 day MA, and the 0.9000 level.
USDJPY – looks set for a retest of the range highs in May and July at 114.40, with a break targeting 115.60. Below the 113.40 area retargets the 112.40 level.
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