European equity markets suffered on two accounts yesterday.
First, the rally in the pound on the back of comments from Angela Merkel in relation to Brexit caused a large decline in the FTSE 100 as the traditional inverse relationship between sterling and the equity benchmark kicked in. The Bundesbank, said it didn’t see the need for any stimulus package to be introduced, and that weighed on the DAX, and to a lesser extent other eurozone markets too.
The German Chancellor showed some flexibility and optimism with regards Brexit, by saying that a solution can be found that can uphold the principles of the Belfast Agreement 1998, as well as maintaining the integrity of the EU’s single market. This exact issue has been the sticking point of deadlock, and a solution hasn’t been put forward yet, but at least we are seeing some goodwill and constructive language being brought to the table.
The pounds’ recent decline against the euro and the US dollar appeared to have bottomed out last week, and in light of Merkel’s comments yesterday we might see a positive run on sterling. Since Boris Johnson became UK Prime Minister, the chatter about a no-deal Brexit increased, but we might have turned a corner yesterday.
US stocks finished on a mixed note last night. Concerns about the health of the US economy grew slightly in the wake of the latest services and manufacturing PMI reports. Services reading dropped from 53 in July to 50.9 in August, and the manufacturing update showed a slight contraction. These reports aren’t anything to get alarmed about, but it highlights that some aspects of the US economy are soft.
Equity markets in Asia are a little higher despite the tensions between Japan and South Korea, and the dip in the yuan. Ordinarily these issues would have a negative impact on stocks, but the optimism ahead of Powell’s speech is global.
We will hear from Jerome Powell, the head of the Fed at 3pm (UK time) at the Jackson Hole Symposium, and the update will give us an insight into what the Fed might do come September. Judging by the minutes from the July meeting the central bank seems content to sit on their hands, but it is worth remembering the US-China trade situation has intensified ,and so has the unrest in Hong Kong ,and that might prompt Mr Powell to be a touch more dovish than he was in late July.
The markets have been pricing in lower rates from the Fed, but keep in mind, it is the policymakers who call the shots, and it is worth noting that unemployment in very low, earnings are solid, and retail are strong, and the economic climate is not calling for a rate cut.
At 1.30pm (UK time) Canadian retail sales will be released and the headline report is tipped to be -0.1% and the report that strips out auto sales is expected to be 0.0%. This week, Canadian inflation held steady, despite economist predictions for a cooler rate, and that implies that demand is holding up, so we might see something similar with the sale updates.
EUR/USD – remains in the wider down trend of 2019, and if the bearish moves continues it might target the 1.1000 area. A rally might encounter resistance at 1.1249.
GBP/USD – has pushed higher for over one week, and while it holds above the 1.2200 mark the bullish trend should continue, and the 1.2400 region might act as resistance. If the market turns lower, and the wider bearish trend returns, 1.2000 might act as support.
EUR/GBP – the weekly candle last week appears to be a bearish reversal, and if the downward move continues it might target 0.8891. A rebound in the currency pair might bring 0.9200 into play.
USD/JPY – has been in a down trend since late April, and if the bearish move continues it might target the 104.63 region. 107.53 - 50-day moving average, might act as resistance should the market rally.
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