A mixed open is expected on Wednesday with the FTSE powering ahead of 6700 whilst shares on the continent appear content to drift without direction.
European stocks pulled back on Tuesday amid uncertainty over Turkey and terrorist incidents in France and Germany, whilst US markets finished narrowly mixed as investors digested a slew of earnings releases.
One of the catalysts for the rally in share prices since the Brexit vote has been the expectation of monetary stimulus. Those expectations were significantly dampened after the Bank of England caught markets by surprise by failing to cut rates last week. Since that decision, the FTSE 100 has been directionless.
Nonetheless, further easing is still expected, but not just from the Bank of England and the Bank of Japan. The Reserve Banks of Australia and New Zealand signalled more stimulus could be in the pipeline in minutes released on Tuesday. And on Thursday Mario Draghi is likely to indicate the ECB is willing to “do what it takes” if Brexit interrupts the fragile European economic recovery.
This potential tidal wave of easing has been enough to carry US stocks to fresh record highs despite another quarterly decline in US earnings for Q2. It has also pumped up demand for the US dollar as simply being on hold makes the Fed relatively much more hawkish thank the rest.
It was demand for the US dollar and a much weaker than expected German ZEW report that took EUR/USD briefly back below 1.10 on Tuesday. There is no real expectation of further easing from the ECB in the near future so there is not a good case for a big snapback higher in EUR/USD if nothing is announced on Thursday. Though with many other banks pointing at more action, the euro could bounce as other currencies decline.
Sterling backtracked despite higher than expected UK inflation data, unable to fend off demand for the dollar as a haven as the IMF downgraded its forecast for UK economic growth. To all intents and purposes, Sterling has fallen into a range whilst the market awaits the next step from the Bank of England.
UK Inflation reached as high as 5% in 2011 but the Bank of England still kept interest rates at 0.5% over fears a hike would hurt the economic recovery. That line of thinking appears likely again under Mark Carney were we to see rising inflation but slower growth. That diminishes the importance of inflation data and also increases odds of a rate cut in August.
On Wednesday labour market data for June is expected to show average earnings tick higher to 2.3% y/y with the claimant count rising by 4.1k, leaving unemployment at 5.0%. It’s possible firms froze hiring in the lead up to and in the immediate aftermath of the referendum, but more likely that those decisions are made over the coming months based on real business conditions.
EURUSD – The euro dropped to 1.10 on Tuesday making a three-week low near the bottom of its range between 1.10 and 1.12. The large downswing on June 24 through the bottom of its old trading range implies further downside towards 1.08.
GBPUSD – After closing above for three days, the pound dipped below 1.32 on Tuesday. There is a short term potential head and shoulders pattern developing with a neckline at 1.31 and an objective of price objective of 1.27. Another test closer to the lows may be needed to establish a bottom.
EURGBP – Euro-Sterling was little change on Tuesday after its strong bounce from 0.825. A break lower could target the old swing high at 0.8117, though the uptrend favours another move higher to the high above 0.86.
USDJPY – Dollar-yen broke its 50-day MA on Tuesday for the first time since June 1. The pair faces potential resistance from the June 24 peak near 106.8.
Equity market calls
FTSE100: to open 13 points higher at 6,710
DAX: to open 3 points lower at 9,978
CAC40: to open unchanged at 4,330
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