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Iranian tensions hits equity sentiment, oil surges

Iranian tensions hits equity sentiment, oil surges

Global stock markets started off the New Year on a positive note. The Peoples Bank of China (PBoC) revealed plans to lower the reserve requirement ratio (RRR) by 50 basis points on 6 January. 

The news lifted stocks in China, and the bullish sentiment rippled out around the globe. The planned move is unlikely to spark a major uptick in lending, but it shows the dovish view of the Chinese central bank.

The news from the PBoC complemented the optimistic sentiment surrounding the US-China trade story. President Trump tweeted the first phase of the trade deal will be signed on 15 January. The Dow Jones racked up yet another record-high yesterday.

President Trump will be looking to start talks on phase two of the trade deal as his America first mentality will bode well certain sections of the electorate. Mr Trump loves to boast about the rally in the stock market as well as the drop off in unemployment – both will stand to him come election time. He is likely to ramp up the rhetoric against China in a bid to secure a second-term in the White House.

Overnight, stocks in Asia fell on the back of the news that an Iranian military commander will killed in Iraq by US airstrikes. Tensions in the region sent oil surging too.

Yesterday we saw the release of the final reading of the manufacturing PMI report for major eurozone economies, the UK, plus the US. None of the reports triggered much interest from traders. As far as the euro area goes, the French manufacturing sector is the strongest as it is just about expanding – which speaks volumes about the industry. Brexit uncertainty continues to hang over the UK economy as the manufacturing industry remains in contraction – it has endured negative growth for eight months.

The US dollar rebounded yesterday, but in late December the currency dropped to a five month low, so bargain hunters entered the fold.

Gold powered ahead despite the rally in global equities and the firmer US dollar. A risk-on sentiment or a stronger US dollar can often be enough to weigh on the metal, but the fact that neither could hold the metal back underlines the bullish sentiment.               

French CPI will be posted at 7.45am (UK time), and economists are expecting the rate to edge up to 1.4% from 1.2%. Economists are anticipating an increase in the German inflation rate to 1.4%, from 1.2%, the figure will be posted at 1pm (UK time). The inflation rate in the eurozone has been subdued recently, and the ECB are aiming to push the rate up to close to 2%, so traders will be paying close attention to the French and Germany reports.

The German unemployment rate is tipped to hold steady at 5%. The report will be released at 9am (UK time).

Several UK economic reports will be posted at 9.30am (UK time). Mortgage lending is expected to be £3.9 billion, while mortgage approvals are tipped to come in at 64,450. The BoE consumer credit report is expected to come in at £1 billion.  

At 3pm (UK time) the ISM manufacturing PMI update will be revealed. The reading is expected to improve to 49 from the flash reading of 48.1. Keep in mind the 47.8 reading for September was the lowest in a decade.     

EUR/USD – has been pushing higher since late November and while it holds above the 100-day moving average at 1.1061, it might retest 1.1300. A move to the downside might target the 1.1000 area. 

GBP/USD – has rebounded from the recent pullback and it seems the wider upward trend is still in play. Should the bullish move continue, it might target the 1.3500 area. A move lower might find support at the 50-day moving average of 1.2976.         

EUR/GBP – remains in the wider downtrend and if the bearish move continues it might retest 0.8276. A rebound might run into resistance at 0.8544 – the 50-day moving average.    

USD/JPY – while it holds below the 50-day moving average at 108.94 it could target 107.88. A move to the upside might encounter resistance at 109.72.    

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