The divergence between US and European markets continued to widen towards the end of last week, with US markets still breaking records, while European stocks buckled under the weight of a higher euro, despite increasing evidence of broad based economic improvement across the euro area.
Rising consumer confidence, a “euphoric” German IFO, along with better than expected Q2 GDP numbers from Spain and France, doesn’t appear to be translating into confidence in the valuations of the biggest European companies, with the German DAX hitting a three month low last week.
This may have something to do with the fact that the economic improvement being seen across the continent is focussing minds on the timing of when the European Central Bank may have to rein back its bond buying program. While this is one of the reasons behind the recent recovery in the euro, the other is declining expectations that the Federal Reserve will hike interest rates as aggressively as previous priced in to bond markets.
This is certainly part of the story but it isn’t all of it, with confidence in the US dollar also declining for political reasons as the optimism of a Trump reflation boom being replaced by a realisation that the US administration seems more intent on fighting battles amongst themselves, than enacting much needed reforms, and governing the country.
Last week’s US Q2 GDP showed that the US economy was ticking along nicely but it also showed that price inflation remained weak, with the employment cost index dropping to 0.5%, and it is this low inflation story that appears to be causing a paralysis of confidence in global policymakers.
Today’s latest flash EU CPI numbers for July are expected to show that inflation in Europe remains benign at 1.3%, though there is the possibility that Friday’s hotter than expected German CPI numbers might boost this number to 1.4%. Core CPI is expected to remain steady at 1.1%.
On the unemployment front in the EU it is expected to show another fall, coming in at 9.2%, and while that is expected to be an 8 year low, a lot of these jobs have been at the lower end of the wage range, or as ECB President Mario Draghi said recently, “relatively poor quality”.
Over the weekend heightened tensions on the Korean peninsula and some slightly weaker than expected China manufacturing and services PMI numbers for July don’t appear to have had too much of an effect on sentiment in Asia markets which are currently in broadly positive territory. Manufacturing PMI came in at 51.4, slightly below the consensus of 51.6, while services came in at 54.5.
The pound is also set for a big week as we head into August and a year since the Bank of England cut rates to a record low of 0.25%. Earlier this month the Bank of England governor Mark Carney warned about complacency around consumer debt levels.
Later this morning we’ll get the latest lending numbers for mortgages and consumer credit, as we gear up for this week’s Bank of England rate meeting and quarterly inflation report. Mortgage approvals for June are set to remain steady at 65k, while net lending is expected to slow down a touch from the numbers seen in May, as declining consumer confidence and rising inflation squeezes wages, not to mention the uncertainty created by the June election result.
EURUSD – the euro continues to push up towards the 1.1795 level and 200 week MA. Support remains back at the 1.1610 level, and below that at the 1.1480 area. Only a break below the 1.1480 area opens up a pullback towards the 1.1300 area.
GBPUSD – has continued to edge higher making a new high at 1.3159 last week, as we look to head towards the 1.3300 level. Currently finding support just above the 1.3000 level for now, with a drop below potential opening up a retest of the 1.2900 level. A move below 1.2900 opens up the 1.2700 area.
EURGBP – unable to break above the 0.9000 level last week, a move to the 0.9300 remains possible, but we do appear to be running out of steam. A break below 0.8870 would delay this and open up a move back to the 0.8780 area.
USDJPY – currently looks vulnerable to a move below 110.50 and a move towards the 109.80 area. We need to see a move above the 112.30 area to stabilise and argue for a retest of the 113.20 area.
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