US markets returned from their long weekend yesterday and picked up where they left off at the end of last week, to post new record highs yet again, helped in no small part by some decent earnings reports from a number of key US household names.
Sentiment was already fairly positive as a result of a positive carry through from European markets which saw better than expected PMI data from France and Germany which has helped boost optimism that the momentum seen at the end of 2016 is starting to accelerate into 2017, despite rising political uncertainty. This optimism has seen the DAX break out of its recent range to trade within touching distance of the 12,000 level and towards the record highs last seen in April 2015.
The weakness of the euro probably hasn’t hurt in this regard either as it continues to slip back, despite rising evidence that inflation is starting to reassert itself. Yesterday’s PMI data showed that prices were rising at their fastest levels since May 2011, helped by a combination of a weak euro and rising oil prices.
With this in mind today’s final EU CPI reading for January may well be the start of a move towards the ECB’s 2% inflation target. Initial readings have come in at 1.8%, and today’s reading is expected to see that confirmed, however subsequent readings are likely to see that figure push higher. Core prices are set to be confirmed at half this level at 0.9%, nonetheless it will soon become much more difficult for ECB President Mario Draghi to push back against calls for a tapering of monetary policy sooner rather than later.
In the UK the pound continues to find a degree of resilience that has been surprising given concerns about some of the direction of recent economic data. Yesterday’s comments by Bank of England policymakers about confidence in their forecasts almost came across as an admission that their forecasting models weren’t fit for purpose.
The admission by MPC member Gertjan Vlieghe that most economic models can never be perfectly accurate regardless of how much data and analysis is put into an excel spreadsheet, won’t have been a surprise to most of us who have sat and watched as the UK economy confounded predictions of disaster in the aftermath of the Brexit vote.
That is because no spreadsheet can factor in that one big variable which has no clearly defined value, that of emotion, sentiment, psychology, whatever you want to call it, the human factor and how different people react to a variety of different stimuli.
This effect is expected to be illustrated by today’s second iteration of Q4 GDP which is expected to be reconfirmed at 0.6%, and an annualised 2.2%.
More importantly the weakness of the pound is expected to help exports contribute 2%, while imports are expected to fall from 1.4% to 0.5%. Services are still expected to provide the majority of the expansion at 0.8%, though a little worryingly business investment is expected to stall.
We finish the day with the release of the January minutes of the Fed’s FOMC meeting which aren’t expected to add too much to the recent debate about a March rate rise given recent comments from senior Fed policymakers in recent days.
These minutes pre date the extremely positive January payrolls numbers as well as the latest inflation and wages data. The recent testimony of Fed chief Janet Yellen to lawmakers last week is now probably the most accurate guide to the central banks mindset at this point in time along with recent comments from Fed policymakers Harker, Fischer and Kashkari. It is unlikely that today’s minutes will add much to the overall picture.
EURUSD – if we break below the support at the 1.0520 area, we could well see a return to the lows this year near 1.0340. We need to recover back through the 1.0680 area to retarget the highs at 1.0800.
GBPUSD – the pound has continued to find support around the 50 day MA at 1.2400. The lack of rebound is a concern which could see it break lower towards 1.2250. A move above the recent high at 1.2580 retargets the 1.2700 area.
EURGBP – the break of the 200 day MA at 0.8465 opens up the prospect of a retest of the December lows at 0.8300, as downside momentum accelerates. For this momentum to subside we need to see a recovery back through the 0.8520 area.
USDJPY – currently mid-range between the recent peaks just below the 115.00 level and the range lows at 111.60 in the short term. We need a break either side to determine the next move.
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