Yesterday saw another disappointing session for markets in Europe, despite more evidence of improving economic conditions, particularly in Germany where Q3 GDP came in at 0.8%. This in turn helped push the euro back up to the 1.1800 level for the first time this month.
US markets also struggled to make gains closing lower, as investors took their cues from disappointing Chinese data which raised concerns of a disappointing end to the year for the world’s second biggest economy, as well as diminishing expectations of progress on US tax reform.
Markets in Asia have picked up on yesterday’s weaker finish, tracking lower as weaker commodity prices weighed on risk appetite. Crude oil prices have also started to show signs of peaking over concerns about the demand outlook after the IEA cut its demand outlook for 2018 by 100k barrels per day over the next 12 months. With Russia starting to express doubts about extending OPEC cuts beyond March 2018 this could be a catalyst for further losses in crude prices ahead of this month’s OPEC meeting in Vienna.
This is set to translate into another weaker European open as equity markets continue to show signs of further tiredness at a time when investors might be tempted to start to take further profits as we head towards the end of the year.
The pound came under pressure yesterday after CPI inflation for October came in unchanged at 3%, which must have been a welcome relief to Bank of England governor Mark Carney, who must have expected to have been writing a letter to Chancellor Philip Hammond explaining why inflation had risen in excess of over 1% beyond the 2% inflation target. While food prices rose at their fastest rate in four years, it was fuel prices that came to the rescue helping keep headline inflation at its recent peak of 3%.
Whether that remains the case given recent gains in oil prices in recent weeks remains to be seen, but there does appear to be some optimism that we could well be at the high water mark for rising prices, particularly since input prices slipped back quite sharply from 8.1% in September to 4.6% in October.
If we have indeed seen inflation peak then that would be welcome news, particularly if wage pressures continue to build up from their current 2.1% level.
With unemployment at 42 year lows of 4.3%, it surely can only be a matter of time before wage pressure starts to manifest itself further.
Having hit a low of 1.7% earlier this year average earnings have struggled to move beyond the 2.2% level for most of the summer, slipping back to 2.1%, in the three months to August, last month.
This is expected to edge back up to 2.2% for today’s September numbers with hopes rising that we could see further wage gains in the months ahead. We’ve already started to see increasing evidence that wages at the lower end of the income scale are rising at rates faster than inflation as the effects of increases in the minimum and living wage help pull up wages at the bottom of the pay scales.
In London wages have risen in excess of 4.5% while elsewhere in the country we’ve seen rises of up to 3.6%, for up to 150k workers.
This should inevitably see a trickle up effect as earners higher up the income scale start to demand higher wages in a tightening labour market, which in turn is likely to prompt speculation about the timing of another rate rise.
EURUSD – managed to move back above the 1.1700 level opening up the prospect of a retest of the October peaks at 1.1880, undermining the prospect for losses below the recent lows at 1.1550. The break back above the 1.1700 could well argue for a return towards 1.1910 and the recent peaks above 1.2000.
GBPUSD – continues to remain remarkably resilient with support in the mid 1.3000’s and while above the lows this month the prospect remains for a return to the highs above 1.3220 and towards 1.3320 and the highs this month. A move below 1.3000 argues for a move towards 1.2930.
EURGBP – the break back through the 0.8940 area and 100 day MA argues for a retest of the October peaks at 0.9020. Support now comes in around the 0.8920 area as well as 0.8870.
USDJPY - we need a move through the 114.50 level to argue for further gains towards the 115.60 area. Support comes in at the 113.10 area and last week’s low, with a break of 113.00 retargeting the 112.40 area.
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