Over the past couple of days we’ve seen a decent rebound in equity markets as risky assets start to regain some of their attraction, as concerns about tensions in North Korea show signs of settling down a little.
In spite of the recent rebound we still remain below the levels we were sitting at a week ago, which suggests that a certain degree of caution remains, with US markets struggling to make any gains at all after a strong Monday session.
Markets in Europe nonetheless still look set to open slightly higher as we look ahead to this morning’s confirmation of EU GDP, which is expected to come in at 0.6%.
The US dollar enjoyed another decent day yesterday, moving to a three-week high after a strong rebound in retail sales for July, as well as a strong Empire manufacturing survey for August which showed activity at its best levels in nearly three years. While encouraging, these numbers can’t disguise the fact that inflationary pressures still remain weak.
Despite this concern there still remain a number of US policymakers who favour another rate rise by the end of the year, with the US dollar gaining support from New York Fed president William Dudley’s assertion that he remained in favour of both another increase in rates, as well as the beginning of the winding down of the Federal Reserve’s balance sheet.
This evening’s FOMC minutes are likely to give markets a flavour of the discussion that was had at the July meeting between Fed members about the possible timing of when that process might begin. In comments made yesterday, the head of the Dallas Fed, Robert Kaplan, also suggested that this process should begin soon.
A fall in fuel prices prevented the latest UK CPI numbers moving higher again in July, after the sharp drop seen in the June numbers to 2.6%. More importantly core prices also remained stable at 2.4% once again reinforcing the belief that the worst may well be over with respect to higher prices. This was also helped by further falls in producer price inflation which also fell back more than expected in July.
While these numbers caused markets to put back the prospect of a possible rate rise, they should still be viewed as positive, given that they haven’t worsened the squeeze on consumer incomes, which means that today’s wages numbers become even more important.
The most recent wages numbers saw weekly earnings excluding bonuses for June come in at 2%, up from 1.7% in May, an encouraging sign that we may have seen wages start to show signs of a rebound at a time when ILO unemployment is at and expected to remain at a 42 year low of 4.5%.
With employment levels at record highs any signs of a tighter labour market could well offer the pound some significant support which means that a strong wages number today could offer the Bank of England that “goldilocks” scenario of falling inflation and rising wages and potentially move the debate back to the timing of a possible rate rise, given Bank of England chief economist Andrew Haldane’s recent comments about wage growth.
EUR/USD – currently finding support just above the 1.1680 area however it’s currently struggling to move much beyond the 1.1850 area, which raises the prospect of a deeper move lower towards 1.1620. We still remain on course for a move towards the 1.2000 area, as long as the 1.1620 level holds in the short term.
GBP/USD – the pound slipped below the 1.2930 area testing the trend line support at the 1.2850 area, where we also have the 100 day MA. A break below here has the potential to fall towards the July lows at 1.2810, as well as the 200 day MA at 1.2650. A move back above 1.2930 is needed to stabilise and retarget the 1.3040 area.
EUR/GBP – currently finding resistance at the 0.9130 area as it looks to head towards the November 2016 peaks at 0.9300. Support currently comes in at the 0.9040 area and below that at the 0.8980 area.
USD/JPY – the US dollar has had a decent rebound in the last two days from the 108.70 area but we need to move beyond the 111.30 area to suggest a wider move towards 113.00. While below the 111.30 the risk remains for a retest of the recent lows.
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