It’s been a somewhat schizophrenic start to the year for stock markets on both sides of the Atlantic, as investors struggle to cut through the politics of what has thus far been an uncertain couple of weeks.
Last week the FTSE100 posted its first weekly decline in seven weeks as well as its worst weekly performance since the beginning of November, while US markets, though closing higher on Friday recorded their second successive weekly decline.
While President Donald Trump’s inauguration speech received a lot of attention due to its introspective and protectionist nature, the reaction of US stock markets was pretty sanguine in spite of all the criticism of the tone of the speech.
Whether that remains the case remains to be seen, as markets get a better feel of what type of President he intends on being. It could be argued that Friday’s speech may well have been aimed at a more domestic audience, while economic realities further down the line might dictate a more nuanced approach to policy, however that remains to be seen, and trying to second guess it would be a mistake.
Weekend pronouncements on renegotiating the North American Free Trade Agreement (NAFTA), the withdrawal from the Trans Pacific Partnership (TPP) are likely to be the first of many policy announcements with more set to come if Friday’s speech is any guide.
What is clear is that this new US President will go about doing things his way, as he sets about making his mark on the US economy, and markets had better take note, as it becomes clear that Donald Trump intends on acting the same way as President as he did on the campaign trail.
The US dollar has had a slightly more difficult time of things in recent days, perhaps reflecting the rising uncertainty on the effects a Trump presidency will have on the US economy, declining for the fourth week in succession, despite speculation of more US rate rises being on the way.
On the data front this week we’ll get to see the first estimate of Q4 GDP numbers for the US economy at the end of the week as the new US President sets about dismantling Barack Obama’s legacy.
Also on the agenda this week it’s an important week for the pound after last week’s strong gains. Somewhat paradoxically the pound jumped sharply after Theresa May announced the UK governments intention to leave the single market.
The rebound can perhaps be attributed to the removal of uncertainty and clarity on the direction of travel as the journey towards an EU exit moves onto its next stage. Tomorrow could well introduce some additional volatility with the UK Supreme Court ruling on the triggering of Article 50.
This ruling has perhaps lost some of its importance in the overall scheme of things given last month’s parliamentary debate and non-binding vote approved the government’s timetable to begin Brexit talks by the end of March. This means that when the vote to trigger Article 50 is called it would be a major surprise if MP’s were to then block it.
Later this week we also get the first glimpse of how the UK economy performed in the last quarter of 2016, with the first iteration of the Q4 GDP numbers.
EURUSD – with trend line support at 1.0550 from the lows this year, the prospect of further gains towards 1.0850 on a break above 1.0720 remains a real possibility. A move below 1.0540 retargets the 1.0450 area.
GBPUSD – having failed to take out the 1.2000 level last week, the pound could well have seen a base in the short term, having posted a key reversal week. With support at 1.2250 a break of the 1.2440 area could well signal a move towards 1.2800, and the December highs.
EURGBP – made a low of 0.8609 last week before rebounding but remains vulnerable to a move towards the 0.8480 area and needs to break back above the 0.8750 area to retarget the recent highs. A move through the 0.8580 could well be that catalyst for a move lower.
USDJPY – last week’s sharp rally ran into resistance at 115.80 before falling back below 115.00. A move back below 114.30 would retarget the 112.55 area, while a move above 116.00 retargets the 117 00 area.
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