After slipping back on Friday the US dollar bounced back yesterday as trade concerns returned to centre stage, and US economic data continued to outperform with ISM manufacturing coming in at a four-month high, which helped US markets recover from a shaky start to finish the first trading of Q3 modestly higher.
This in turn could well translate into a positive open in Europe this morning, aided by a reduction in political tension in Germany after the CDU and CSU managed to put aside their political differences over migrant policy.
Other global markets weren’t so fortunate yesterday, as the implementation of Canadian tariffs along with escalating rhetoric out of the US at the weekend, fed into a risk off narrative which saw European and Asia stock markets slide sharply at the beginning of Q3, as risk aversion undermined commodity prices, and commodity currencies.
Reports that the European Commission had warned the US that attempts to impose tariffs on EU car imports risked retaliation of $300bn on US products saw Asia markets slide heavily and while European equities also came under pressure, the declines were slightly more measured.
Political dysfunction in German politics also helped play a part with the euro coming under pressure over concerns about the stability of the German government, however a late compromise appears to have averted an imminent crisis here with the CDU and CSU agreeing to the creation of transit centres on the Austrian border to deal with migrants who had previously been registered in other EU countries.
The pound also came under pressure over continued splits in the Conservative government over “Brexit” policy ahead of this week’s cabinet meeting at Chequers.
On the data front the latest European manufacturing PMI’s were a mixed bag with France lagging behind, pulling the wider Eurozone manufacturing number down to an 18-month low, while in the UK the manufacturing sector came in slightly stronger at 54.4, a three-month high. Some firms expressed concern about the business outlook against the prospect of rising input costs, as well as continued uncertainty around government policy on Brexit, but that’s not really anything new.
Today’s construction PMI for June is expected to remain subdued as the sector continues to absorb the aftershocks of the Carillion collapse in January, though the data has picked up since a fairly weak Q1, with expectations of a repeat of the previous two months at 52.5, which would still be a significant improvement on how the sector fared at the beginning of the year.
In Europe consumer spending has shown signs of stagnation so far this year after a patchy performance in 2017, and today’s EU retail sales numbers for May could well reinforce concerns about declining consumer confidence, at a time of rising oil prices. Today’s retail sales are expected to show a monthly gain of 0.1% but given last week’s shocking 2.1% decline in German retail sales there is a risk we could see this number miss by some distance.
EURUSD – Friday’s rebound failed to move beyond the highs at 1.1720 and as such we remain range bound, though we now have support at the 1.1620 level. A move back below the 1.1600 area opens up a retest of the May lows at 1.1510/20. A break below 1.1500 has the potential to open up a move towards the 1.1360 level.
GBPUSD – Friday’s rebound could well translate into a move higher given it had to the look of a bullish reversal, after last week’s low at 1.3050. The lack of follow through on the downside below 1.3100 makes the pound susceptible to short squeeze. The next resistance comes in at the 1.3220 area with a break targeting 1.3340.
EURGBP – despite moving beyond the 200-day MA at 0.8830 and almost touching the 0.8900 area, we closed well short of it. If we fall back below 0.8820 then we could well drift back towards the 0.8780 area, with broader support at 0.8700.
USDJPY – moved back above the 110.00 area last week which brings the recent highs at 111.00 back into focus. A move through 111.00 targets 112.00. Support now comes in at the 109.70 and 109.20 area.
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