European markets look set to open slightly higher this morning as the Trump effect in Europe started to wear off yesterday, while the on/off saga of whether OPEC will cut oil production continues to produce wild swings in oil prices.
For the last six months the German DAX and the EuroStoxx50 have struggled to overcome the 10,800 and 3,100 levels respectively, testing them on a number of occasions without managing to push higher. This week we’ve seen yet another failure, begging the question as to whether we could be on the cusp of a retest of the downside.
With the US dollar index hitting its highest levels in 14 years, and US stock markets near to or setting new record highs, there surely must come a time when markets start to question the logic of such moves.
For most of the last two years US markets have made hard work of higher levels precisely as a result of concerns that a stronger US dollar would shrink US company overseas profits, and yet here we sit with both looking remarkably resilient.
It seems that just over a week after Mr Trump’s surprise win that investors now can’t decide whether the new President-elect’s intended plans to boost spending and cut taxes will boost inflation as much as currently anticipated.
Bond markets initially sold off again yesterday before paring losses after US PPI data unexpectedly dropped back sharply in October, with the month on month number contracting, raising the question as to whether the strength of the US dollar could act as a fiscal tightener all by itself in the coming months, thus limiting the upside in forward price pressures.
In any event US markets slipped back last night with the Dow closing lower and breaking a seven day winning streak, while the US dollar index remained close to its new 14 year peaks.
Even though yesterday’s US PPI numbers were disappointing US CPI still remains close to its highest levels in over 2 years, with a rise to 1.6% expected from 1.5% in September later today, while the US Federal Reserve is widely expected to push interest rates higher next month.
Before that though we have the latest in UK retail sales data after some fairly decent numbers on the inflation, unemployment and wages front earlier this week.
Despite all the uncertainty being generated around the UK’s future in the EU, the economy continues to tick along nicely even if as expected the economy starts to hit more turbulent waters in the New Year, as a raft of widely anticipated price rises start to filter through.
For now wages are rising at 2.4%, unemployment is at 11 year lows and inflation on the RPI measure is at 2%. Earlier this month the latest BRC retail sales numbers for October showed that consumers had started to spend again with a sharp rise of 1.7%, from 0.4% in September.
Whether today's official retail sales numbers for October are anywhere near as good remains to be seen, but when set against an August and September performance of 0% and -0.1%, then we could well be due a decent number, with a rise of 0.5% expected.
The recent drop in the euro particularly against the US dollar should have ECB President Mario Draghi cracking open the Prosecco as the central bank looks to boost inflation, and even though CPI inflation is at 2 year highs it still remains painfully low at 0.4%.
Today’s final EU October CPI number is expected to see that number confirmed, which still remains well below the central banks 2% target.
EURUSD – the euro has slid below the 1.0700 level, opening up the prospect of a move towards the 1.0460 level and last year’s low. To confirm a break of trend line support from the all-time lows at 0.8200, we need to see a sustained break below 1.0600. We would need to see a recovery back through 1.0830 and then the 1.0950 area to stabilise.
GBPUSD – the pound continues to find support above the 1.2380 area which keeps the prospect of a move back towards the 1.2670 level on the table. The prospect of further gains towards 1.2880 remains a possibility, while above these lows. Only a move through 1.2330 opens up the potential to revisit the recent lows near the 1.2100 area.
EURGBP – the decline through the 0.8780 area to the 0.8565 area has the potential to extend even further towards 0.8380 in the short term. For this to unfold the euro needs to stay below the 0.8780 area in the short term.
USDJPY – we’ve seen the US dollar move towards the 110.00 area, falling just short at 109.75, which also happens to be the 38.2% retracement of the 125.85/99.55 down move. A break of 110.00 could well see move towards 112.70.
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