Strong US markets appear to be helping shore up European stocks, as a series of earnings beats pushed the S&P 500 and Dow to their highest levels since 22 March, as well as above their 50-day moving averages.
This was driven largely by a strong performance from the tech sector, with Netflix leading the way, as investors shifted their focus away from concerns about trade for a moment.
Markets in Asia picked up on the positive finish in the US, while also being helped by yesterday’s cut by China of bank reserve requirements by 100 basis points for some commercial banks, and this positive tone is expected to carry over into today’s European open.
The pound's recent run of gains against the dollar came to a halt yesterday, despite wages data that posted its best gain since 2015, when real incomes were rising at a much higher rate than they are now. Wages for the three months to February managed to rise by 2.8%, edging above the headline number CPI number for that month of 2.7%, the first time since the beginning of last year that we’ve seen positive real wage growth. Having seen seven consecutive positive daily closes, the pound was probably due a decline in any case, and yesterday’s wages data appeared to provide the excuse. Wages data including bonuses didn’t come in at 3% as most expected, rising by 2.8% instead.
The key question is whether this is likely to be sustained in the coming months, and for sure as a result of unemployment falling again to a new 42-year low of 4.2%, the upward pressure on wages should be expected to rise. A number of policymakers on the Bank of England's monetary policy committee expect just such an outcome. The fall in the unemployment rate was a little bit of a surprise given recent headlines about job losses in the retail and construction sectors, with reports of over 20,000 jobs either lost or under threat so far this year.
As far as inflation is concerned the rise in the pound against the US dollar since the beginning of last year is helping to exert downward pressure on prices, though they could still remain sticky for a while. This is because inflation is likely to remain underpinned as a result of domestic factors such as higher council tax and utility bills which are due to come through in the next few weeks.
Today’s March CPI numbers are expected to come in at 2.7%, unchanged from February, though there is the possibility that we could see a fall to 2.6%, which might prompt some further sterling weakness in the very short term. Core prices are also expected to fall back as well, from 2.5% to 2.4%.
It’s also an important day for EU CPI for March, which has been pretty lacklustre for a while now despite fairly strong economic numbers for nearly 18 months now. In February prices came in at their lowest levels for over a year at 1.1%, having been in a steady decline since May last year. The March numbers are expected to show a pick up to 1.4%, however core prices are expected to remain anchored at 1%, well below the ECB’s 2% target level.
The Bank of Canada is also expected to meet to discuss the interest outlook, though no change in policy is expected from the current level of rates at 1.25%. Having seen the Fed move again at its March meeting many are speculating that the Canadian central bank may well match this move in the coming months. This isn’t likely to happen much before the summer, despite economic data that by and large has been fairly good, though wages growth has continued to be subdued.
In addition, the Canadian dollar has been on a march higher in recent weeks as markets factor in the higher oil price, while ongoing concerns about a NAFTA deal being concluded are likely to keep the bank cautious. These latter factors along with lacklustre wages, would suggest that the Bank of Canada may well hold off for now and adopt a wait and see approach.
EURUSD – popped briefly above last week’s high yesterday sliding back from 1.2413. This inability to sustain a move above 1.2400 may well see a slide back to the 1.2320 level, but in no way changes the fact that we still remain in the broader of 1.2200/1.2500 range which continues to dominate. We need to see a break below 1.2160 or a break above 1.2540 to suggest a strong move in either direction.
GBPUSD – made a new post Brexit vote high at 1.4376 yesterday before slipping back. As long as we hold above the 200-week MA at 1.4250, and this week’s low at 1.4230, then further gains towards 1.4500 remain possible. We also have support at 1.4080 as well as the 1.3970 area.
EURGBP – posted a marginal new low at 0.8620 but is struggling to move much lower for now. This suggests we could see a rebound back to the 0.8690 area. The current weakness suggests the prospect of a move towards the 0.8300 level and 2017 lows. Only a move back above 0.8750 would stabilise and suggest a return to the 0.8800 area.
USDJPY – continues to look a little soggy after last week’s failure at the 107.80 area. While above last week’s lows at 106.60 the risk remains for a move towards 108.20. 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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