UK election battle is on, Fed in focus

CMC Markets

UK political uncertainty put pressure on the FTSE 100 yesterday as talk of a general election before Christmas encouraged traders to trim their positions. 

The mood at the closing bell yesterday had switched to a more guarded one as traders were getting used to the possibility of an election in December.

Last night it was announced that a general election will be held on 12 December. The Conservative Party are polling well but Jeremy Corbyn’s Labour Party performed better than many expected in 2017, hence why some dealers are cautious. Politics has become so polarised in the UK in the last few years, there are concerns in some quarters that no clear majority could be returned to Westminster.

The S&P 500 printed another all-time high yesterday, but the bullish sentiment cooled a little after it was announced that phase one of the US-China trade agreement might not be signed next month. President Trump is due to meet China’s Xi Jinping in Chile in November at the Asia-Pacific Economic Cooperation summit. The Trump administration said if phase one isn’t signed, that doesn’t mean that progress is not being made. The meeting would still be deemed to be a success even if phase one isn’t wrapped up, so stocks didn’t tumble on the announcement. 

Stock markets in Asia traded lower overnight on mild concerns about the state of the US-China trading relationship. Mr Trump is keen for China to ramp up its agricultural purchases to as much as $50 billion, but Beijing don’t want to commit to an amount or timeframe.   

The Federal Reserve will be in focus today as the central bank will announce its interest rate decision at 6pm (UK time), and the press conference will follow 30 minutes later. Traders are pricing in a 94% probability of an interest rate cut of 25 basis points. The Fed lowered rates in June as well as September, but that hasn’t been enough for President Trump or the markets.

The US unemployment rate is at a fifty year low, plus average earnings are comfortably outstripping inflation, so workers are getting an increase in real wages, so it seems strange the US central bank are potentially going to cut rates again. In recent months, the Fed have talked about adjusting their policy in accordance with the data. Manufacturing as well as services have slowed down but three rate cuts in four months seems excessive. Regardless of the rate decision, the press conference will be closely watched. 

At 7.45am (UK time) the French consumer spending update will be posted, and economists are expecting to see an increase of 0.1%, which would be an improvement on the 0.0% posted in August.

The German unemployment rate is tipped to hold steady at 5%. The report will be published at 8.55am (UK time). German CPI will be posted at 1pm (UK time), and the rate is expected to cool to 0.8% from 0.9%.

The US ADP employment report is tipped to come in at 120,000, which would be a step down from the 135,000 jobs added in September. At the same time, the advance reading of the US GDP in the third-quarter will be announced. Economists are expecting a reading of 1.6%. Keep in mind the economy grew by 2% in the second-quarter.      

The Bank of Canada will announce its interest rate decision at 2pm (UK time). The central bank is tipped to keep rates on hold at 1.75%.

At 2.30pm (UK time) the EIA report will be announced. Oil stockpiles are expected to increase by 729,000, while gasoline inventories are anticipated to decline by 2.3 million barrels.   

EUR/USD – has been driving higher since the start of the month, and a break above 1.1200 might put 1.1249 on the radar. A move lower might bring the 50-day moving average at 1.1036 into play.    

GBP/USD – remains in the recent aggressive upward trend and a sizeable break above the 1.3000 area might bring 1.3178 into play. A move lower might put the 200-day moving average at 1.2712 on the radar.           

EUR/GBP – is still in the bearish trend, and a break below 0.8575 could pave the way for 0 8471 to be targeted. If it manages to hold above the 0.8600 mark, it might retest 0.8786. 

USD/JPY – while it holds above the 50-day moving average at 107.60 it could target 109.31. A move back below the 50-day moving average might bring 106.48 into play.