The financial markets saw a jump in volatility on Friday on the back of the assassination of an Iranian military commander in Iraq by the US.
The move sent the oil market surging, while stocks largely fell. Dealers were on edge that Iran would have some sort of retaliation against the US. European equity benchmarks largely finished lower on Friday, but the FTSE 100 managed to finish in positive territory due to the relatively large weighting of oil stocks in the British index. US equity markets lost ground on account of the Iranian situation. It is worth noting that US as well as European equity markets were strong in advance of the US airstrikes against the Iranian military commander.
The massive rally in the oil market was tempered by the mixed Energy Information Administration reports. US oil inventories dropped by more than 11 million barrels while traders were only expecting a drop of 3.2 million barrels. Meanwhile the gasoline inventories climbed by more than 3 million barrels, and the consensus estimate was for an increase of 1.8 million barrels. Oil finished firmly in positive territory, but well off the highs of the session.
Over the weekend political tensions between the US and Iran rose even further. The Iranian regime dropped a big hint that it would have a military retaliation against the US, while President Trump made it clear that is has earmarked 52 sites in Iran for airstrikes – should the regime hit back at the US. The Iranian government said it will no longer stand by the uranium enrichment commitments it made in 2015 – this is likely to keep the two nations at odds with each other. Donald Trump has threatened to slap severe sanctions on Iraq if the country expels US military personnel from the country – oil rose again, and stocks in Asia are lower.
On Friday, Gold rallied to a level last seen in September as dealers snapped up the metal in response to the fall in stocks. It was a clear example of traders pushing for an asset that is deemed to be lower risk. Gold isn’t too far from the September highs, and should that metric be cleared it should pave the way for further gains.
The euro had broadly a positive session on Friday thanks to decent inflation figures from the two largest economies in the euro area – Germany and France. The French CPI rate rose to 1.6% - a 10 month while, while the German CPI level hit 1.5%. The readings point to higher demand in the eurozone.
The US ISM manufacturing reading fell to 47.2 – a new 10 year low. It is concerning that manufacturing in Germany, the UK as well as the US are performing so poorly. By comparison the latest Caixin survey of Chinese manufacturing points to small growth in the industry.
Overnight, the Caixin survey of Chinese services was released and the reading was 52.5, while economists were expecting 53.2. The previous reading was 53.5.
Later this morning, the major economies of Europe will revealed the final readings of their services PMI reports for December. Spain, Italy, France, Germany, the UK will post their figures, and the consensus estimate is 53.9, 51, 52.4, 52 and 49.1 respectively.
Eurozone PPI is expected to increase to -1.5% from -1.9%. The report will be released at 10am (UK time).
The final reading of the US services PMI report for December will be posted at 2.45pm (UK time), and traders are anticipating 49.1, which would be a fractional improvement from 49 in the flash reading.
EUR/USD – has been pushing higher since late November and while it holds above the 100-day moving average at 1.1062, it might retest 1.1300. A move to the downside might target the 1.1000 area.
GBP/USD – while it holds above the 50-day moving average at 1.2985, the wider bullish move should continue. The 1.3500 area might act as resistance. A break below the 1.2900 area could bring 1.2690 – 200 moving average, into play.
EUR/GBP – remains in the wider downtrend and if the bearish move continues it might retest 0.8240. A rebound might run into resistance at 0.8600.
USD/JPY – while it holds below the 50-day moving average at 108.93 it could target 107.88. A move to the upside might encounter resistance at 109.72.