In the absence of US markets yesterday for Thanksgiving, markets in Europe had a fairly low key session. With most US investors likely to take an extended weekend when US markets reopen later it could well be more of the same today in what has been a rather up and down week for markets in Europe.

Despite a continued improvement in economic data with manufacturing and services PMI’s in both France and Germany showing solid improvements, reaching multi year highs in the process, stock market gains have been difficult to sustain despite two successive weeks of losses.

Whether this is down to the effects of a weaker US dollar pushing up the euro, or concern about the political gridlock in Germany is hard to tell but the DAX has been struggling, with the CAC40 only performing slightly better.

Yesterday’s ECB minutes did show that policymakers were split about whether to put an end date on the current asset purchase program, largely over concern about the lack of inflationary pressure, however it is increasingly likely that more numbers of the kind seen yesterday could well prompt further calls to start signalling an earlier end to the current program. Given the strength of yesterday’s German PMI’s it would be a surprise if today’s German IFO business survey didn’t also point to an improvement in confidence from last month’s 116.7 reading when the data is released later this morning.

On the political front it seems unlikely that the current coalition negotiations in Germany will prompt any loss of confidence in the performance of the economy, even if they drag on well into next year. If anything political gridlock tends to help rather than hinder as politicians have less time to meddle.

Short of new elections it remains doubtful that any coalition would in any way be stable given how toxic previous ones have been for the junior partners in recent years. In the last twenty years the SPD’s share of the vote has halved from 40% in 1998 to around 20% now. There would appear to be very little upside in repeating the same pattern of the previous few years in supporting Merkel and getting tainted by association.

The US dollar continued to slip back after Wednesday’s minutes hitting two month lows against the Japanese yen and one month lows against a the euro and sterling, as uncertainty about US rate policy in 2018 continued to undermine the currency against the backdrop of a flattening yield curve.

US crude oil prices continued to play catch-up with Brent yesterday hitting two year highs in the process after the Keystone pipeline from Canada was shut down due to an oil spill. While US prices haven’t hit the $60 a barrel level there is speculation that a further rise will in all likelihood bring about a further surge in output ahead of next week’s big OPEC meeting. US production is already running close to 10m barrels a day, a record thus making it a key exporter to compete with Russia and Saudi Arabia.

Speculation is growing that OPEC could well extend the output cap that has been in place for nearly a year now from March 2018 further out into next year, though there are reports that Russia may not be that keen.

EURUSD – continues to push higher, heading back towards the October peaks just below 1.1880 and previous right shoulder. If we break through here then 1.2000 could come back into play. Support remains back down near 1.1720. 

GBPUSD – finding resistance at the 1.3340 area for now and while below remains vulnerable to a slide back to the 1.3150 area. A break above 1.3350 retargets the 1.3450 area. Only a move below 1.3120 opens up the prospect of a retest of the range lows at 1.3030.

EURGBP – the euro appears to have found some support in the last few days but we need to see a move back through 0.8920 to argue for a retest of 0.8960. While below the risk is for a move towards the 0.8820 level. We could see a test of major support near the November lows at 0.8735.

USDJPY – has fallen through the 111.80 area as well as the 200 day MA and looks set to for a move down towards the 110.30 area. This negative development could see a revisit of the range lows. We need to see a move back through 112.00 to stabilise.

FTSE100 is expected to open 5 points higher at 7,422

DAX is expected to open 5 points higher at 13,013

CAC40 is expected to open 3 points higher at 5,382

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