European markets underwent a disappointing session yesterday, largely as a result of concern about rising infection rates across Europe, a warning from the WHO about a serious situation in Europe, and central banks that decided to sit on their hands for the time being, when it came to implementing fresh stimulus measures.
US markets also underwent a fresh bout of weakness with the tech sector along with banks leading the declines, though crucially both the S&P500 and Nasdaq managed to finish well off their lows of the day, in a week where stocks have struggled for traction.
Today’s European session is likely to see a cautiously mixed start as we come to the end of a week that has seen central banks decide to sit on the sidelines for the time being.
It’s been an important week for UK data this past few days, and on the whole, there has been grounds for optimism that the economy has rebounded better than originally anticipated in the wake of the gradual easing of lockdown restrictions. There are, of course, genuine concerns that the ending of the furlough scheme next month may herald a sharp spike in unemployment as we head into Q4, but overall things could be a lot worse. This was something that the Bank of England acknowledged yesterday when they said that the recovery from the lockdown in Q2 had beaten their expectations.
It was therefore a little surprising to hear that the MPC was actively looking at options to manage a move in interest rates below zero, and into negative territory.
The change of tone was all the more surprising given that Bank of England Governor Andrew Bailey, in comments made earlier this year, expressed concern about the effects that such a move might have on the UK’s financial sector, which is a much bigger part of the economy, than other advanced economies.
The revelation was all the more surprising given the complete lack of any evidence that negative rates make any positive contribution to monetary policy at all.
Today’s latest UK data is the latest retail sales data for August, which should have benefited from the Chancellor of the Exchequers “Eat Out to Help Out” scheme, which resulted in restaurants across the country having one of their best August months in years. In some parts the success of the scheme may well have come at the expense of the supermarkets, which may well have sold less food products, as a result.
Anecdotally, there were queues outside some restaurants in my local area, every Monday, Tuesday and Wednesday during August.
It would be a surprise therefore if we didn’t get a decent number for retail sales, with expectations of a rise of 0.8%, which seems a little on the conservative side. A positive number in August would be the fourth successive monthly gain, following on from 12.3%, 13.9% and 3.6% in May, June and July respectively. It would also be the first time that UK retail sales had posted four successive monthly gains since 2016.
Of course with localised lockdowns and curfews now starting to be reimposed this could well be as good as it gets, and that could well be why the Bank of England is starting to look at further measures to help support the economy, especially with the political noise around Brexit and a UK/EU trade deal starting to get a bit louder. The only mystery is how on earth they believe that negative rates will be able to do that!
EURUSD – slid back towards the neckline support yesterday but was unable to break below the 50-day MA, rebounding from 1.1738. The 1.1720 level remains a key support, with a break targeting the 1.1500 area. The high this week at 1.1900 remains an important level. Above 1.1920 retargets the 1.2000 area.
GBPUSD – the pound took a bit of a tumble yesterday, however the losses proved short-lived, with the next key resistance remaining at the 1.3020 area. The support still seems fairly solid, down near the 1.2750/60 area and 200-day MA support. The risk remains for a move lower through 1.2730 towards the 1.2500 area, while below the 1.3030 area.
EURGBP – the failure to move back above the 0.9170 area yesterday keeps the onus on the downside, and a retest of the 0.9080 area, and possible lower towards 0.9020. Above 0.9170 retargets 0.9220.
USDJPY – the July lows at 104.20 remain a key support, with a retest still the favoured option while below the 105.30 area. Above 105.30 retargets the 106.20 area.