While last week saw new records for US markets and a positive week for European stocks, the US dollar finally gave up all of its post-Trump gains, as investors weighed up the prospect that the Federal Reserve could well be done hiking rates for this year.
An unexpectedly cautious testimony from Fed chief Janet Yellen to US lawmakers, as well as some disappointing economic data on the part of the US consumer and some more weak inflation data, appears to raising doubts about the pace of future US rate rises, even though there does appear to be more consensus about reducing the size the Fed's balance sheet.
That this caution about the US central bank's future intentions is coming at a time when speculation is growing that other central banks may be considering reining back on stimulus, doesn’t appear to be hurting US markets, which saw the Dow and S&P 500 hit new record highs last week. But it does appear to be acting as a little bit of a brake on European markets, which have found further upside progress much more difficult.
Last week the Bank of Canada also raised rates, becoming the third central bank this decade to do so and following in the footsteps of June’s US rate rise. This week attention is set to turn to the Bank of Japan and the European Central Bank, as speculation grows that pressure on ECB president Mario Draghi is increasing to outline an exit timetable for the ECB’s own stimulus programme.
This speculation gained some traction at the end of last week, that Mr Draghi might use the annual central bankers' symposium at Jackson Hole at the end of August to lay the groundwork for what the ECB might do as we head into 2018, especially after recent comments from a number of senior ECB officials that a change in stimulus settings may come as we head into Q4. This would suggest that the prospect of any change of tone this week is unlikely, and that the main drivers are likely to be on today’s EU CPI inflation data for June, which is expected to be confirmed at 1.3%, with core prices at 1.1%.
The pound will also be facing a key week after breaking above 1.3100 for the first time since last September, ahead of key inflation data tomorrow, and a speech by Bank of England governor Mark Carney. The pound had a decent week last week, after a rebound in wages and another decline in the unemployment rate to a 42-year low.
Recent splits on the Bank of England policy committee has also raised the prospect that policy might change by the end of the year, with some speculation on a reversal of last August’s rate cut, as well as a suggestion by MPC member Ian McCafferty, who voted to raise rates in June, that the Bank might also consider cutting back on the size of its stimulus programme.
This week markets in Europe look set to open higher, taking their cues from this morning’s better-than-expected Chinese Q2 GDP data as well as the latest industrial production and retail sales data for June.
Recent Chinese data has shown that the Chinese economy has managed to hold up fairly well in Q2, after a solid start to the year in Q1, which saw an improvement to 6.9%. Q2 managed to match this performance, helped in no small part by improvements in consumer spending, as well as industrial production in June, which came in at 7.6%, well above the 6.5% expected, while retail sales jumped to 11%, a decent increase down from May’s 10.7%.
EUR/USD – if we break above the 1.1500 area we have potential to head back towards the 2016 highs at 1.1617. While resistance at the 1.1490 area holds we do remain susceptible to a pullback towards the 1.1300 area. Only a move below 1.1280 opens the possibility of a move back to the 1.1100 June lows.
GBP/USD – have finally managed to push through the 1.3040 area opening up the prospect of a move towards 1.3300 which would complete the breakout that started back in April. The 1.3040 area should now act as support for this move, with a move below that retargeting 1.2970.
EUR/GBP – last week’s failure at 0.8950 has seen the euro slip back sharply and post a bearish weekly reversal having slipped back below the 0.8770 area, which should now open up the 0.8700 area, as well as the 200 day MA at 0.8630.
USD/JPY – after last week’s failure at the 114.40/50 area, we could well slip back further with the break below the 112.70 area potentially opening up a retest of the 111.60 area and the 200 day MA.
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