The progress seen in the last four weeks in European markets doesn’t appear to be showing much sign of slowing down, despite a little softness earlier in the week. A positive session yesterday in the wake of yesterday’s ECB meeting and a strong US session overnight appears to be putting us on course for a fifth successive week of gains in Europe.
Markets in Asia were steady as a historic summit between North and South Korea got under way, as the two leaders sat down face to face as a prelude to more detailed peace talks for the first time in over ten years, while the Bank of Japan kept its own monetary policy unchanged, removing a reference to when they expected to meet their inflation target of 2%. At the same time Tokyo core CPI fell back from 0.8% to 0.6%, which suggests the central bank probably isn’t that optimistic about hitting its target any time in the near future.
The weakness in the euro and the pound, against a weaker US dollar, against a backdrop of some decent earnings announcements and firmer commodity prices appears to be working in favour of markets in Europe with a positive open expected this morning.
The euro also hit a three-month low after the ECB press conference despite what on the face of it appeared to be a fairly upbeat assessment of the economy in Europe. Behind the optimism it would appear that policymakers might be more concerned about the recent data slowdown than they are actually letting on if ECB President Draghi’s remarks are any indication. His remark that the ECB needed to determine if the slowdown was temporary or more permanent gave the game away that policymakers were a little more concerned than they were letting on, content for the markets to assume that the slowdown concerns were down to seasonality. It is clear that the ECB is in no rush to give any indication into the timing or otherwise as to the next steps on monetary policy, hence the slide in the euro.
The pound has spent the last few days in a state of flux in the wake of last week’s comments by Bank of England governor Mark Carney that a rate rise in May isn’t the done deal markets thought it would be just over a week ago.
While the pound is lower against the US dollar on the week, it has recovered somewhat against the euro, Japanese yen and Swiss franc. The Bank of England governor’s unexpected intervention appears to have come about as result of some weaker than expected economic data in recent weeks, which has prompted some wider questions about the resilience of the UK economy.
Today we’ll get to see early indications of how much of an impact the problems in retail and the construction sectors have had on the UK economy, with the latest Q1 GDP numbers. While they aren’t likely to be particularly strong with an expectation of 0.3%, this hasn’t been anything new in recent years. Services is expected to contribute most of the gain, with construction likely to be a drag.
Over the last two years Q1 has been the weakest quarter and has subsequently been followed by a pickup in Q2 and Q3, which suggests, despite the well documented problems in the retail sector, that we could see something similar unfold this year as well.
It also doesn’t change the fact that the UK economy has grown every quarter since the first quarter of 2013, and yet in that time we’ve had both a rate cut and a rate hike, consequently rates have never been above where they are now since 2009.
We are way beyond emergency level interest rates and a 25 basis point rate rise is unlikely to be material one way or the other. If you have any doubts ask Alex Brazier the Bank of England’s executive director on financial stability who told politicians last week that “we should not see large swaths of the household sector getting into distress because interest rates have gone up”
It’s also Q1 GDP day in the US and here as in the UK economic activity is expected to soften little despite rising wages and a low unemployment rate. In Q4 the US economy grew by 2.9% on an annualised basis and this is expected to slip back to 2%, as a global slowdown and uncertainty over global trade brings about softer economic activity across the globe.
A stronger than expected US GDP number could well act as further fuel to the current rebound in the US dollar, as well as pushing US bond yields higher from their already currently elevated levels.
EURUSD – pushed below the 1.2150 level and March lows, in the process opening up the prospect of a move towards the 1.1800 level. This would appear to complete a topping pattern that has been playing out over the last few months. A move back above 1.2320 is needed to argue for a return towards the recent highs.
GBPUSD – downside pressure still dominates while below the 1.4020/30 area. Another new low for the week at move below this week’s low at 1.3895 keeps the prospect of a move towards the lows this year at 1.3710. We need to break back through the 1.4030 area to stabilise in the short term and argue for a return to the 1.4130 level.
EURGBP – slipped below the 0.8690 level and as such we could head back towards the 0.8620 lows earlier this month on a break below the 0.8680 area. Resistance remains back near last week’s peaks at 0.8790, and below the 50 and 100-day MA’s.
USDJPY – moved through the 109.20 area and could well follow through towards the 200 day MA at 110.20. For that to unfold we need to hold above the 108.80 area. A move below 108.70 reopens up a move back towards 108.20.
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