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EU CPI set to hit a 13 year high, EU GDP in focus

Inflation rising

We saw yet another day of record highs for US stocks yesterday, this time the S&P500 and Nasdaq setting the tone, however as we head into the end of the week and the month, we could well see a bit of a pullback after both Amazon and Apple missed expectations after the bell, both selling off sharply, as they blamed higher costs, and supply chain disruptions.

European markets have spent the last couple of days slipping off their recent highs, more on inertia than anything else, and look set to open slightly lower again this morning after the earnings disappointments from Amazon and Apple sent US futures lower.

US economic data was a bit of a mixed bag yesterday, as weekly jobless claims continued to fall back, pulling continuing claims down to their lowest levels since the beginning of March 2020, at 2.24m, while Q3 GDP slowed sharply to 2% from 6.7% in Q2, as rising Delta infections hammered consumer confidence and crimped economic activity during the quarter.

Today we get a look at early indications of EU Q3 GDP, along with the preliminary releases for France, Germany, and Italy which are likely to show similar levels of economic activity, despite lower infection rates.

Recent economic data out of Europe has shown that economic activity appeared to have peaked in Q2, and while we’ve seen a bit of a slowdown, the fall off hasn’t been that bad, with a lot of consumers across the EU appearing reluctant to spend their excess savings all at once. Political uncertainty in Germany hasn’t helped either, while the rebound in services elsewhere has been hindered by slower vaccine rollouts, as well as various travel restrictions

As we look at this morning’s French Q3 GDP numbers, expectations are for an improvement to 2.2% from 1.1%, while in Germany the picture is expected to be fairly similar with Q3 GDP also expected to come in at 2.2%, an improvement on Q2’s 1.6%.

Italian Q3 GDP is expected to slow from 2.7% to 2%.

All of this is expected to see EU Q3 GDP remain steady at around 2.2%, unchanged from Q2.

While the economic picture appears to have been fairly steady over the summer months, there is concern that rising prices could well start to reduce purchasing power and slow economic activity further. This is something the ECB is concerned about and was referenced by ECB President Christine Lagarde at the ECB press conference yesterday.

German CPI for October rose again yesterday to 4.6%, from 4.1% in September, and the highest levels since 1992. The last time German CPI was at these sorts of levels German base rates were at 6.75%.

This is expected to translate into much firmer headline inflation at the EU level, and something that some on the ECB governing council are more worried about than others.

There has certainly been a significant increase in chatter amongst some ECB policymakers that the central bank needs to start calling time on its PEPP program, given the sharp rises we’ve started to see in the headline CPI numbers, and these fears are only likely to get louder when today’s flash CPI numbers drop later this morning.

Since June, EU CPI has risen from 1.9% and could well hit 3.7% today which would be the highest level since 2008. The ECB will insist that a lot of this is transitory and that argument holds water while core CPI remains subdued, which it has thus far, currently at 1.9%.

On current numbers the EU certainly has a lesser inflation problem than others, however the recent surge in energy prices will certainly help to sow further debate amongst the hawks and the doves on the ECB governing council, and an insistence that PEPP ends in March next year.

UK consumer credit is expected to pick up modestly in September, rising to £0.5bn, from £0.4bn in August, while mortgage lending is expected to remain steady at between £5bn and £6bn.

EUR/USD – pushed above resistance at the 1.1630 area towards the 50-day MA and 1.1700 area which could act as resistance now we’ve moved towards the 1.1680 level. Support now comes in the 1.1620 area.

GBP/USD – we have support at the 50-day MA at 1.3720, and while it holds, we need to see a move through the 1.3840/50 area and 200-day MA to target the 1.3900 area. A move below 1.3700 is needed to open the 1.3670 area.

EUR/GBP – the failure to break below the 0.8400 area has seen the euro squeeze back higher. A break below the 0.8400 area targets the 0.8280 level. We need to break above the 0.8480 level to target the 0.8520 area.   

USD/JPY – finding support at the 113.20 area. The November 2017 peak at 114.75, remains the key resistance. The 113.20 area is the next key support, followed by the 112.40 area. 

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