European markets underwent a disappointing session yesterday weighed down by a combination of factors, including downbeat comments from US Republican House Speaker Kevin McCarthy that no progress had been made on some of the key issues with respect to the debt ceiling, disappointing Chinese economic data, and poorly received earnings updates.
All three of these factors weighed on US markets as well, along with a downbeat assessment of future demand from DIY retailer Home Depot, as US investors look to weigh up key numbers from Target later today and Walmart tomorrow, although the trading range was narrow, as it has been for most of the last few days.
None of this appears to be affecting Japanese markets which have seen the Topix push to its highest level in over 30 years, and the Nikkei 225 which has pushed above the 30,000 level. The latest Japan GDP numbers showed the economy grew by 0.4% in Q1, with the recent weakness in the Japanese yen helping to underpin the recent move higher.
The US dollar also edged higher, moving back towards its recent highs on the back of continued hawkish jawboning from more Fed officials, with Cleveland Fed Mester and Richmond Fed’s Barkin both suggesting that more might need to be done on rate hikes, while yields edged higher again.
The weak finish in the US looks set to weigh on markets in Europe when they open later this morning, however there isn’t really any real direction to proceedings currently with markets seemingly stuck in a range.
Today’s proceedings are likely to play out in a similar fashion with little on the docket apart from the final reading of EU CPI for April, with Fed speakers appearing to be taking the day off, after two days of hawkish chatter.
With the ECB stepping down the pace of its rate hiking cycle earlier this month, raising rates by 25bps, in response to a slight fall in core prices in the April flash CPI to 5.6% the governing council will be hoping that this early fall is confirmed in today’s final numbers, and thus ease the pressure on the central bank to hike further.
ECB President Christine Lagarde was at pains to insist that the ECB was far from done when it comes to further rate hikes, as have been other governing council members.
Sadly, for her the market appears to have a different view, with the euro sinking over the last few sessions, and while headline CPI is expected to be adjusted a touch higher to 7%, the sharp declines being seen in PPI suggests that we could be heading lower on the inflation front over the next few months, whether we see agreement on further hikes or not.
EUR/USD – struggling to rebound back above 1.0900 for now with support currently at the 1.0840 area. A break below 1.0820 opening ups the potential for further losses and support at 1.0770. Rebounds likely to find resistance at the 1.0940 area.
GBP/USD – still have support at the 1.2440 area after last week’s sharp losses. A move below 1.2430 could signal further weakness towards the 1.2280 area in the short term, where we also have trend line support from the October lows. Resistance currently at 1.2540.
EUR/GBP – continues to struggle below the 0.8740 area and the 200-day SMA, although we are still holding above last week’s low at 0.8660 key support. A move below 0.8650 could see a move towards 0.8620.
USD/JPY – continues to edge higher and back up towards the next resistance at the 200-day SMA at 137.00, with the March and May peaks at 137.80/90 also a key barrier. We have support at the 50-day SMA, at 133.80.