The IMF cuts its growth forecasts for both the UK and US over the weekend while raising its forecasts for Europe and the rest of the world. It cited a less than anticipated expansionary fiscal policy from the United States along with protracted political uncertainty, as well as corrections to rich market valuations as key risks to its forecast.
More gains for the euro last week saw the currency hit a two year high, which in the process sent the German DAX to a three month low. It would be the ultimate irony that a continued recovery in European economic data, could be the catalyst to prompt further losses in European equity markets, as it would invite further pressure on European Central Bank officials to pullback from their ultra-accommodative stimulus measures.
As it is last week’s attempts by ECB President Mario Draghi to underscore a dovish narrative while warnings of the downside risks of a tightening of financial conditions, failed miserably to convince markets that the ECB wouldn’t be looking to taper its bond buying plan by year end.
To be fair to him given events on the other side of the Atlantic he could have announced an increase to the monthly purchase plan and it probably wouldn’t have made a blind bit of difference. Investors appear to be having a crisis of confidence in the US dollar, as President Trump’s problems mount and confidence in any form of imminent reform program dissipate.
It is unlikely the Federal Reserve will come to the rescue later this week either, given the bond market positioning on inflation expectations. Last week saw the weakest demand for US 10 year Treasury inflation linkers or “TIPS” in nine years, sending the US 10 year yield to its lowest level this month, which suggests that for all the FOMC’s confidence on the inflation outlook, it’s a view that isn’t shared by the bond market.
Today’s flash manufacturing and services PMI’s from France and Germany for July could underscore the European recovery story, a recovery that while growing jobs at a steady rate over the past few months, still has an unemployment rate of 9.3%.
In France where the recovery has been the most surprising this year economic activity is expected to slip back modestly to 54.6 for manufacturing and 56.6 for services, where it has outperformed Germany’s economic performance.
The latest German services data is expected to show an improvement to 54.3 from 53.7, while manufacturing is expected to remain at 59.3, a six year high.
Crude oil prices are also expected to be in focus after last Friday’s sharp fall on reports that OPEC supply for July is likely to exceed June’s number, and take output to over 33m barrels a day.
For all recent talk of compliance with production cuts most commentators know that it is Saudi Arabia that is doing all the heavy lifting, and with Libya and Nigeria excluded from the numbers the perception was that the output extension, agreed in May was always a paper tiger. With Ecuador breaking ranks last week to increase its production on the grounds it needs the money, today’s meeting in St. Petersburg could open up further splits if bigger OPEC members decide they could do with the extra revenue for higher output.
EURUSD – having taken out the 2016 high at 1.1615 we’ve seen the euro continue to push higher with the next target being the 200 week MA at 1.1800. We now have support at 1.1610, while below that support at the 1.1480 area. Only a break below the 1.1480 area opens up a pullback towards the 1.1300 area.
GBPUSD – currently struggling to get back above the 1.3000 level, but while 1.2900 the momentum remains positive. A move below 1.2900 opens up the 1.2700 area. We need to get back above the 1.3020 area to regain the positive momentum.
EURGBP – the focus has now shifted back to a retest of the 0.9000 level and last year’s high at 0.9300. Support now comes in at the 0.8870/80 area.
USDJPY – having broken below the 111.50/60 area last week the focus now shifts for a move towards the 110.20 area. We need to recover back through the 112.30 area to look at a retest of the 113.20 area. Below 111.60 opens up the 110.20 area.
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