While the pound underwent its worst week for seven years, equity markets by and large enjoyed a broadly positive performance last week, helped by another strong week for the banking sector, as well as continued resilience in the mining and oil and gas stocks, in the process enjoying their best run of gains this year.
It could be argued some of these gains were as a result of some optimism about this weekend’s events in Shanghai as G20 finance ministers met to discuss the global economy. Another factor behind the recent gains though is that the market had become quite oversold, and coming into the end of the week and month, it is likely to have prompted some portfolio adjustment, as European equities look at the potential for three successive months of losses, and the worst run of losses since 2011.
Rather predictably the G20 communique was an exercise in saying a lot, while doing very little, though the UK did get its wish of a mention that the risks of a “Brexit” would have on the global economy.
Putting to one side the dubiousness of that particular claim, the final communique did acknowledge that monetary policy wasn’t enough on its own to boost global growth, which was a start. Even so there were no details on what extra fiscal measures could be taken to help complement central bank policy, as policymakers went on to suggest that market concerns about future growth prospects were overblown. This lack of any significant positive outcome from the G20 looks set to weigh on European markets this morning as we start a new week, and end the month.
Chinese officials do appear to have persuaded the G20 they are not intending to pursue a policy of deliberate devaluation in the coming months, though it seems quite likely that could well happen, especially if Chinese economic data continues to show little sign of picking up.
This week’s official and Caixin manufacturing and services PMI’s for February could well offer up some key clues in that regard, and let’s not forget we still have an ECB meeting next week which could well usher in a new round of tit for tat action on the coming weeks, particularly if today’s February EU CPI inflation numbers fall back sharply, which seems likely after last week’s weak German numbers, and shockingly bad Spanish numbers. Expectations are for CPI to fall back to 0% from 0.3% in January, with core prices falling back from 1% to 0.9%.
The pound looks set to remain under some amount of pressure as uncertainty ahead of the June referendum “Brexit”poll continues to push the prospect of a rise in interest rates ever further out into the future. It seems quite likely that the pound could well close at its lowest monthly level against the US dollar since 1985.
Some of this sterling weakness has come about due to US dollar strength where we saw the US dollar index post its strongest week since early November, after some fairly strong economic reports last week, which appear to have assuaged some of the more pessimistic outlooks on the US economy, and also brought back into play the prospect of further tightening later this year.
This week’s US data could well reinforce that perception or knock it back down again, with the latest ISM manufacturing and services reports as well as the latest February payrolls report, due out later this week.
EURUSD – currently just about holding above the 1.0900 area, but a break has the potential to open up a move towards 1.0620, trend line support from the 2000 lows at 0.8230. We need to get back through the 200 day MA at 1.1050 to stabilise for a move higher.
GBPUSD – continues to look weak with the risk of a move towards the 2009 low at 1.3500. A monthly close below 1.4100 would also be the lowest close in over 30 years since the pound rebounded from its all-time lows at 1.0500 that same year. We need to see a recovery back through 1.4090 to stabilise.
EURGBP – has stalled out just below the 200 week MA which is the key resistance on the upside at 0.7945. A weekly close through here could well see further gains towards 0.8100. Support lies all the way back near the 0.7720 area.
USDJPY – the US dollar appears to be finding support around the 111.00 area for now, with twin support at this level for now. With resistance at 114.80 we would need a technical break of 116.00 to argue a short term base is in place. While below 115.00 the risk is for a larger move lower to 106.00 in the longer term.
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