European markets saw a strong session yesterday, helped by a Federal Reserve who soothed market concerns that they had taken their eyes off the ball when it comes to inflation risks.
The surprise decision by the Bank of England to raise interest rates also built on that narrative, and while the timing was curious, it was still welcomed by a market that had started to doubt the central bank's credibility, as well as its ability in recognising rising inflation risks.
US markets also started the day on the front foot, however as the day progressed a sell-off in the Nasdaq started to weigh on the wider market, as the prospect of slightly higher rates chipped away at the attractiveness of some of the more richly valued sectors, dragging the S&P500 and Dow along with it.
This late US weakness looks set to weigh on today’s European open in a week that has seen a lot of chop but not much in the way of direction. Asia markets also slipped back as a result of the weakness in US markets, while the Bank of Japan left monetary policy unchanged.
Today the focus remains on the UK economy in the wake of yesterday’s surprise Bank of England rate hike, which sent the pound to a three-week high against the US dollar.
Despite the concerns over Omicron, this week's UK data reinforced the need for the Bank of England to look at starting to raise rates to buy some protection against concerns over rising inflation risk. While there are many who have rightly questioned the timing of yesterday’s move, if the MPC had hiked in November, and done nothing yesterday no one would have batted an eyelid. Once again, the conversation is about its communications strategy, or rather the lack of it.
Nonetheless we are where we should be on rates, as we look ahead to today’s retail sales numbers for November. This is one area of the UK economy that has been in the doldrums for quite a few months now, with little in the way of growth in consumer spending since the big 9.2% jump in April. In October we finally saw a decent uptick of 0.8%, as consumers finally started to spend in the leadup to Christmas.
Given the concerns over supply chain disruption around the world the call went out fairly early on for consumers to start Christmas shopping early to avoid disappointment. This trend is certainly manifesting itself in the US retail sales numbers, and the UK numbers are unlikely to be any different.
UK retail sales excluding fuel for November are expected to see a 0.8% gain, down from 1.6% and if we do see a positive number, it will be the first time since March and April, that we’ve seen two consecutive months of gains in retail sales.
In Germany we also get to see the latest IFO Business Climate survey for December, and if yesterday’s flash PMI numbers are any guide it's unlikely to be an uplifting experience. Services PMI fell to its lowest level since February, as the German economy wrestled with surging Delta variant Covid cases. The survey is expected to weaken in a similar fashion sliding to 95.6, and a similar 10 month low.
Before that the latest German PPI numbers for November are expected to hit a new record high of 20%, up from 18.4% in October. With power prices in Germany continuing to hit record levels it's not within the realms of probability that this won’t be the peak.
All the while EU headline CPI is expected to be confirmed at 4.9% in November, and while ECB President Christine Lagarde insisted at yesterday’s press conference that inflation is transitory and is expected to fall back next year that will be cold comfort to industry across Europe which is wrestling with PPI increases of over 20% per annum. This suggests we will see further increases in EU CPI in the coming months.
EUR/USD – had another push to the upside but continues to struggle below the resistance at the 1.1385 area. The risk of a retest of the 1.1185 November lows remains the line of least resistance. We also have support at the 1.1160 level. A move through 1.1420 argues for a move back to the 1.1520 level.
GBP/USD – yesterday’s rebound took us back up to the 1.3380 area, however we need to push above the 1.34000 area to stabilise, and push up to 1.3500. We still have solid support above the 1.3160 area, which needs to hold for a longer-term base.
EUR/GBP – fell to the 0.8450 area before rebounding. Resistance remains at the 200-day MA at 0.8560.
USD/JPY – flicked up to the 114.30 level before reversing, and moving below 113.70. Support now comes in at the 113.20 area, as well as the 112.50 level. A move through 114.30 targets 115.00.