While the US administration appears to have softened its line on inward investment into the US economy, there still remains a great deal of uncertainty as to whether this slightly softer line will hold, or whether the more hawkish members of the administration will reassert themselves.

It looks set to be a disappointing week and month for European equities beset by concerns about a slowing economy, dysfunctional internal politics, as well as rising concerns about increased trade friction with the DAX in particular being hit hard due to its dependence on exports for generating overall returns.

The FTSE100 has had a better time of it helped by rising commodity prices and a weaker pound over the past few weeks, nonetheless equity markets are having a tough time of it with US markets also coming under pressure and on course to finish lower for the second week in succession, despite closing higher yesterday, as investors take the opportunity to indulge in some end of quarter and half year portfolio readjustments.

The pound has had a disappointing quarter, hitting its lowest level against the US dollar this year, undermined by the failure of the Bank of England to deliver on a widely telegraphed rate rise in May, as well as growing uncertainty and anxiety about the progress of Brexit negotiations. The shambolic approach adopted by the UK government, as well as the failure of the opposition to hold the government to account, has raised concerns about the calibre of the political class in adopting any type of orderly Brexit process, as we head towards the business end of the negotiation process.

Today’s final Q1 GDP revision is expected to confirm the UK economy experienced a bit of a “Beast from the East” freeze of 0.1%, however the performance since then has picked up markedly since then, a fact acknowledged by Bank of England chief economist Andrew Haldane in remarks made yesterday.

The central bank has acknowledged concerns about the rise in consumer credit though this does appear to be showing signs of slowing. Net consumer credit is expected to slow in May to £1.5bn from £1.8bn in April, while mortgage approvals are also expected to slow to 62.2k in May.

US crude oil prices have continued their surge higher in the wake of this week’s announcement by the US State Department on Iranian imports, taking out the highs this year, and hitting levels last seen in November 2014. In less than two weeks US crude prices have risen over 14% from their June lows, which in turn is likely to put upward pressure on US inflation which is already trending just below the Feds 2% target.

Today’s May core PCE number is expected to edge up to 1.9% from 1.8% in April while consumer spending is expected to slip back slightly from the 0.6% reading in April to 0.4% in May. This is happening against a backdrop of personal income increases of 0.3%, though this is expected to come in slightly higher for May at 0.4%. The US economy still appears to be in decent shape with Q2 expected to outperform the Q1 expansion of 2%, however the improvement appears to be happening as a result of US consumers reducing their savings. Rising fuel costs aren’t going to help that ratio.  

In Europe the recent decision by the European Central Bank to announce it would be ending its asset purchase program has raised questions about the wisdom of doing so at a time when political tensions are rising and economic activity appears to be slowing. That said inflation does appear to be returning with expectations that we could see headline CPI return to target of 2% when the latest flash estimates for June are released later this morning, an increase from May’s 1.9% and 1.2% in April.

Core prices on the other hand are likely to remain weak, with expectations that they could well come in at 1%, slightly below the 1.1% seen in May. The ECB may want inflation to return to target, however it is likely to be the wrong type of inflation, the type that crimps consumer spending in the form of higher fuel and energy costs.

EURUSD – the 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. A move back above 1.1630 stabilises.

GBPUSD – the fall below trend line support from the 2017 lows at 1.3110 potentially opens up a deeper move towards 1.2980. We need to move back through 1.3120 to stabilise and argue for a move back to the 1.3220 area.

EURGBP – moved beyond the 200-day MA at 0.8830 opening up a move towards the 0.8900 area. If we fall back below 0.8820 then we could well drift back towards the 0.8780 area, with broader support at 0.8700.

USDJPY – moved back above the 110.00 area yesterday which brings the recent highs at 111.00 back into focus. Support now comes in at the 109.70 and 109.20 area.

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