European equity markets managed to consolidate their midweek gains yesterday, while US markets continued where they left off in the wake of further testimony from Federal Reserve chair Janet Yellen to US lawmakers, which didn't differ that much from her Wednesday remarks.
The Dow Jones posted another record close, while the US dollar remained under pressure as markets adjusted to how the next moves on monetary policy might play out.
The prospect that further interest rate rises may well be much more gradual, if they happen at all, shouldn’t have been entirely unexpected given the risks involved in trying to withdraw stimulus and raise rates at the same time; nonetheless judging by the market reaction it appears to have gone down fairly well.
On the US economy, economic data continues to be fairly unremarkable with inflationary pressures once again showing as fairly benign, and today’s June CPI numbers are expected to reinforce that, coming in at 1.7%.
As far as the US consumer is concerned retail sales have been patchy this quarter, though we did see a strong Q1. The May numbers were disappointing with a decline of -0.3%. June is expected to show a modest rise of 0.2%, as the US consumer pares back spending, probably as a result of the recent increases in interest rates, as consumer credit gets more expensive.
Higher rates have certainly provided a tailwind for banks since the end of last year, with JP Morgan, Citigroup and Wells Fargo all expected to post their latest earnings numbers later today, and here we saw an early case of 'expectation management' back in May when JP Morgan CFO Marianne Lake warned that Q2 might well be disappointing for the US's largest bank.
This may well have been a smart move given how the US yield curve flattened further through May and June, which suggests there is a risk that even the lowered guidance may well fall short, particularly since trading volatility wasn’t exactly high either, so we may well see a downside surprise.
The pound has had a bit of a rollercoaster week in spite of a rocky start as some positive economic data and a bit of hawkish commentary helped provide a platform to arrest some of the losses seen in the early part of the week.
Oil prices have also continued to rebound, closing at their highest levels this week despite rising US production, lower compliance from OPEC members on the oil price cap, as well as a downbeat forecast from the IEA. The Paris-based International Energy Agency cited lower compliance due to higher output from Libya, Nigeria, Algeria and Iraq, which boosted overall output in June.
While inventories once again showed a sharp draw this week, it is expected that any overhang will take much longer to roll off than originally anticipated and as such unless prices are able to recover back above $50 downside pressure is likely to dominate.
EUR/USD – starting to look heavy with sellers just below the 1.1500 area. We could drift back towards the 1.1300 area before making another attempt at the recent highs and on to the 2016 highs at 1.1617. Only a move below 1.1280 opens the possibility of a move back to the 1.1100 June lows.
GBP/USD – having managed to hold above 1.2900 and push above the 1.2930 area keeps the prospect of a move back to the highs at 1.3040 on the table. A move through 1.3040 targets 1.3300, while a move back below 1.2900 reopens the lows at 1.2810.
EUR/GBP – this week’s failure at 0.8950 has seen the euro slip back sharply and could well decline further in the coming days having slipped back below the 0.8865/70 level which had capped it in June. If we stay below 0.8920 we could slip back towards 0.8780, and the 0.8700 level.
USD/JPY – further losses look likely after the failure at the 114.40/50 area, though we are finding support just above 112.80. A move below the 112.70 area could well open up the 111.60 area.
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