They say a week is a long time in politics, and this week it’s also been true for financial markets, given some of the hyperbolic talk of World War Three that was doing the rounds early on Monday morning. In the space of a few days we appear to have swung full circle; with investors seemingly convinced that the problems in the Middle East appear to have settled down, at least for the time being.

While that seems a big assumption to make, it would need a significant escalation now for the current rebound, and while it would be unwise to rule that out, investors have been rotating into gold as a precaution, in addition to buying back into stocks, just in case.

It’s also been another week of records with new record highs for the S&P 500, Nasdaq and Dow, a state of affairs that didn’t look likely when markets opened for trading at the start of trading this week, and while markets in Europe have lagged behind they are also closing in on their previous record peaks.

With this week’s geopolitical risk subsiding as we head towards the weekend, investors now have the opportunity to focus on the signing of the new US, China phase one trade deal next week, as well as the health of the US economy today, and in particular the labour market which has continued to look resilient.

There has been a lot of talk this week that the Federal Reserve might well remain on hold this year as far as rates are concerned. This year could well be problematic politically for the Fed if it doesn’t feel the need to cut rates in the first half of this year, given it is an election year, and could be used as a political punchbag if the economy were to start to slow as we head towards November. For now the US economy appears to be holding up well, bar the manufacturing sector which is in recession, while the services sector is still growing solidly, while the jobs market appears to be performing well.

Wednesday’s ADP employment report for December showed a decent rebound after an initially weak November reading, and while that was subsequently revised up to 124,000 it was still significantly weaker than the more closely monitored non-farm payrolls report, which showed a big jump to 266,000 in November. This shouldn’t have been a surprise given that November tends to be a strong month due to seasonal factors in the lead up to Thanksgiving, as stores hire more part-time and temporary staff for the holiday season.

In today’s December US employment report, we can expect to see a softening to 162,000, however given the strength seen in the employment component of this week’s ISM non-manufacturing report, there is a chance that this estimate may well be on the low side. We should also look for any possible downward revisions to the November number, which was surprisingly stronger than expected.

Wage growth will also be closely scrutinised for any signs of weakness. This is expected to come in at 3.1%, while the unemployment rate is expected to remain steady at 3.5%. If these numbers come in broadly as expected they should be broadly US dollar positive, and reinforce investor perceptions that the US economy still remains some way from slowing down.

The pound came under pressure yesterday after Bank of England governor Mark Carney suggested that the central bank might have to do more stimulus if the much-anticipated Brexit bounce turned out to be weaker than expected.

He indicated that the Bank of England had sufficient headroom to double its 2016 stimulus package of £60bn, which could deliver 100bps of that, while cuts to the base rate, currently at 0.75%, and forward guidance would deliver the rest.

This seems somewhat premature at a time when the debate at the moment is whether the current low rate environment is actually doing more harm than good. Furthermore, given how much damage the Bank of England’s last stimulus intervention did to consumers real earnings you would have thought that officials might want to be more circumspect about their policy musings. Nonetheless given that he only has one more meeting to oversee, he may well merely have been releasing a trial balloon.

In August 2016 the Bank of England’s stimulus measures helped push headline CPI up from 0.6% to over 3% in the space of 12 months, a policy move that ultimately turned out to be premature, as well as unnecessary.

EUR/USD – has also come under pressure this week with the 1.1100 area and 50-day MA acting as support. A move below the 50-day MA could well open up a move towards the 1.1040 area. Currently in a minor uptrend from the October lows but needs to take out the 1.1250 area to signal further gains towards 1.1400.

GBP/USD – has come under pressure this week slipping towards the 50-day MA at 1.3010 which has so far currently held. A break below 1.3000 opens up the 1.2920 area. We need to move above 1.3220 to target 1.3500.

EUR/GBP – support currently appears to be holding at the 0.8450/70 area, and while above here the risk is for a move back to the highs last month and 0.8600 resistance. We also have resistance at the 50-day MA at 0.8540. 

USD/JPY – currently finding it difficult to crack the 109.70 area trend line resistance from the 2018 highs at 114.55. A break of this level has the potential to crack open the 110.70 area. Support comes in at this week’s lows at 107.65.

 

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