The start of the week turned out to be a rather mixed one for European stocks, with the FTSE 100 outperforming as a result of Monday’s better-than-expected Chinese Q2 GDP numbers, which painted a much more upbeat outlook for the world’s second biggest economy.

While this boost to mining stocks helped underpin the FTSE, the slightly stronger euro appears to be constraining the progress of European markets, at least in the short term.

The US dollar tumbled further overnight, pushing above 1.1500 against the euro as further splits in the Republican ranks cast doubt on the ability of the US president to get his healthcare reforms off the ground, which ergo suggests that any other reforms, such as tax, become much less likely, both in the short- and long-term. It would appear that the fractious nature of politics in both the US and UK is helping benefit the euro, and who would have predicted that a year ago?

US markets were lacklustre as well finishing fairly flat, as investors look ahead to further indications as to the health of US corporate earnings, after another disappointing economic indicator in the form of the New York Fed Empire manufacturing survey, which expanded at a much slower pace than expected in July. 

Since last year’s US election and the reflationary optimism at the beginning of the year, only US equities have managed to maintain their strong gains, while the US dollar and US bond yields have retreated.

With inflation still subdued and only flickering signs of wages starting to stir, we could be close to a time when corporate profits start to falter on the altar of stagnant wage growth as consumers stop spending. 

UK inflation could be close to high water mark

Before that we have the latest CPI inflation numbers from the UK, and with pricing pressures starting to show signs of plateauing in both the US and the EU, there is the hope that we may be close to a the high water mark for UK inflation as well. From next month we will start looking at CPI through the lens of the aftermath of last year’s June Brexit vote, when the pound peaked briefly at $1.50 against the US dollar, before dropping sharply to levels close to where we are now.

Recent PPI data does appear to have shown signs of rising at a much slower rate in recent months and this should start to manifest itself in slightly lower levels in the headline CPI rate in the coming months. Today’s June CPI is expected to remain at 2.9% for the third month in succession, while retail prices (RPI) is expected to slow from 3.9% to 3.8%. Any indication that prices are likely to remain sticky could help push the pound even higher, towards 1.3300 in the coming days.

Bank of England governor Mark Carney is due to speak later today as he unveils the new plastic £10 featuring Jane Austen and traders will be looking to see if he has any comment to make on monetary policy. It has been suggested that he might steer clear of mentioning monetary policy given his silence when he unveiled the new plastic £5 note just over a year ago. It does need to be remembered that occasion was just before the EU referendum, when he was on the receiving end of a large amount of opprobrium and he may have felt that discretion was the better part of valour. In fact, in light of recent opinions being aired by other members of the MPC, he might feel compelled to add some of his own colour to the policy debate.    

We also have the latest German ZEW economic survey for July as the German economy appears to go from strength to strength, though we could see a further slowdown this month after the peaks seen in May, particularly since the German DAX appears to be finding it difficult to recover back to the record levels seen in the middle of June, as the strong euro starts to act as a bit of a headwind. That could be something that European Central Bank president Mario Draghi pushes back against later this week, when the ECB meets on Thursday.

Forex snapshot

EUR/USD – having pushed through the 1.1500 area we have potential to head back towards the 2016 highs at 1.1617. If we slip back below the 1.1470 area holds we do remain susceptible to a pullback towards the 1.1300 area. Only a move below 1.1280 opens the possibility of a move back to the 1.1100 June lows.

GBP/USD – the pound has pushed up towards 1.3120, after the break through the 1.3040 level but has started to slip back a little. If we break back below 1.3020 we could slip back towards 1.2970, but the prospect of a move towards the 1.3300 level still remains, while above 1.2900.

EUR/GBP – has found some support at the 0.8740 area but needs to get back above the 0.8820 area to argue for a retest of the 0.8870 level. Last week we saw the euro post a bearish weekly reversal and this raises the prospect of a possible retest of the 200 day MA at 0.8630.

USD/JPY – having rebounded from 112.30 the US dollar needs to get back through the 113.20 area to stabilise and retest the 114.00 area or we could well see further losses towards a retest of the 111.60 area and the 200 day MA.
 

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