We saw another decent day for European stocks yesterday with the FTSE250, German DAX and EStoxx50 all hitting one-month highs as a weaker currency and some decent trading updates helped push markets higher.
With all the noise surrounding Brexit and the fallout from President Trump’s trip to Russia, investors appear to have forgotten that the US is in a middle of trade spat with China as well as the European Union, a fact we were reminded of when Larry Kudlow, the US President’s economic advisor stated that trade talks had stalled between the US and China.
Federal Reserve chairman Jay Powell continued his second day of testimony to lawmakers on Capitol Hill reiterating his upbeat comments from the first day, helping to push the US dollar index back to near its highest levels this year.
The banking sector, which has underperformed this year in the US, has helped lead this week’s rise in US markets, as Morgan Stanley became the latest US bank to blow away expectations on both the top and bottom line for its Q2 earnings.
The Fed’s Beige Book for June pointed to a US economy that is almost running at capacity as a skills shortage and rising costs start to limit companies’ ability to take on new work.
By all accounts this week should have been a good week for the pound, with a host of economic data due out which has been widely expected to support the view that the UK economy has more than rebounded from its first quarter slump. The data certainly support that thus far, however the fractious nature of Westminster politics has taken its toll this week, sending the pound to ten-month lows against the US dollar, while a weaker than expected inflation number has caused some to question as to whether the Bank of England should hike rates in 2 weeks’ time.
This seems a rather skewed way of thinking given that a rate rise is already priced in and not following through could send the pound even lower putting upward pressure on prices, the last thing the central bank wants. As such a rate rise still seems most likely, despite the intangibles of Brexit. A failure to do so would shred any last vestige of credibility the Bank of England currently has.
Consumer spending, which took a knock in the winter months recovered strongly in April due to Easter, rising 1.6%, while the Royal Wedding and good weather in May carried the momentum forward, with another strong reading of 1.3%.
Normally when we get two months of decent activity there tends to be a lull and in some respects that is what some people are expecting with today’s June retail sales numbers with expectations of a rise of 0.1%.
This seems a rather stingy and unrealistic estimate given that we’ve had the feelgood factor of an England football team reaching the semi-finals of the World Cup as well as some scorching weather which is likely to have prompted some decent spending on big screen TV’s, clothing, food and drink and gardening paraphernalia.
Who can forget the images of the various fan zones around the country erupting with beer every time an England goal went in, and there were plenty of them. On-line spending appears to have been fairly decent according to recent data from Visa while the latest BRC numbers showed a 1.1% rise for June in data released last week.
EURUSD – the inability to push below the 1.1600 area has prompted a rebound for the moment. We need to see a move through 1.1600 to open up the May lows at 1.1510/20. Resistance remains back near the 1.1760 area, where we have a trend line from the June peaks.
GBPUSD – even though we made a new 10 month low at 1.3010 yesterday the failure to push below 1.3000 opens up the prospect of a short squeeze, back towards the 1.3120 area. A move back above 1.3120 argues for a move back to 1.3200. Below 1.3000 could well trigger stops down to 1.2880.
EURGBP – has continued to ratchet higher and could well head towards this year’s peaks at 0.8970. Support comes in at the 0.8870 area, with a break lower arguing for a return to the 0.8820 level.
USDJPY – still looks well supported and remains on course for the 113.75 area and December peaks. Only a move below the 112.20 area negates this scenario and argues for a move towards 111.20.
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