There was nothing in last night's Fed minutes to suggest that US policymakers were anything other than determined to see the US economy through the lens of a glass half full, and that a June rate rise remained very much on the table.
With regard to the medium-term outlook most members remained optimistic that higher GDP and inflation would lead to more rate rises in the coming months, with the tax cuts which were enacted in January expected to provide a significant boost. There was no suggestion that policymakers saw any prospect of a slowdown in the coming months, though there was an acknowledgement that a trade war would prompt downside risk.
Yesterday’s March CPI numbers, following on from Tuesday’s PPI numbers only served to reinforce expectations around inflation rising back to target, though one should be careful of reading too much into one month’s numbers. We saw a similar pattern a year ago when US CPI got off to a strong start in Q1, peaking at 2.7% before sliding back below 2% by the middle of the year.
The reaction of both the US dollar and US treasury yields was fairly unremarkable both finishing the day not too far from where they started.
Once again yesterday’s action was in stock markets as the gains seen on the previous day were pared back after President Trump warned Russia to prepare for a missile strike on Syria in response to the gas attack at the weekend despite warnings from Russian officials that they would be shot down and retaliation could arise on the delivery systems of such missiles.
With nerves already frayed sentiment wasn’t helped by reports that Saudi Arabian defence systems had intercepted a number of missiles fired from Yemen, over the skies of Riyadh, which in turn saw oil prices hit their highest levels since December 2014 above $73.
As a result, US markets closed lower on the day though the losses were fairly modest when set against the gains of the previous day. Nonetheless it is probably safe to presume given President Trumps comments earlier in the week, that we may well see a military response by the end of the week, as the situation in Syria ramps up further, and this may well temper investor enthusiasm to buy back into the market ahead of the weekend.
As a result of this reticence, stocks markets here in Europe look set to open slightly lower this morning.
With all of the geopolitical tension, the small matter of economic data is taking a back seat and it has been notable that in the past week or so that we appear to be hitting a soft patch in some parts of Europe.
Yesterday’s UK economic data followed on from the weak German industrial production data we saw last week, coming in well below expectations, prompting some nervousness about the wisdom of a possible Bank of England rate hike next month.
We also saw further weakness in the construction sector but this wasn’t unexpected given the well-publicised problems there, however the weak data that we’ve seen across the board in March would suggest that Q1 GDP could come in as low as 0.2%, which would be unfortunate particularly if the Bank of England were to push rates up next month. In any case Q1 last year was also similarly weak and the UK still managed to grow quite nicely in 2017.
There is also the problem of what recent sharp rises in commodity prices could do the headline inflation numbers in the coming months and in that context the Bank may feel that it has no choice in to nudge rates higher to help keep a lid on prices particularly given that oil prices hit their highest levels since December 2014 yesterday.
EURUSD – ran into resistance at the 1.2400 level yesterday, within the broader 1.2200/1.2500 range that has constrained the price action for much of this year. We need to see a break below 1.2160 or a break above 1.2540 to suggest a strong move in either direction.
GBPUSD – failed to push through the trend line resistance at 1.4220, while the 200-week MA at 1.4250, is also a key barrier for the pound. We have support at the 1.3970 area and below that at 1.3720.
EURGBP – continues to find support around the 0.8700 area with longer term support at last month’s low at 0.8667. We need to see a move back above the 0.8820 level to signal a move back to 0.8920. We have short term resistance at the 0.8750 area.
USDJPY – finding support at the 106.60 area but needs to push up through the highs of 107.50 the highs last week. A move through 107.50 retargets that 108.20 area. The 105.20 area remains a key support with a break below 105.00 opening up a move towards 103.00.
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