While the DAX managed to finish the day higher yesterday the same could not be said for the rest of Europe’s markets, which all finished the day lower, with the catalyst for the underperformance being another weak session for US markets.
Having seen such a promising start to August, last week’s speech by Fed chairman Jay Powell appears to have been the final straw for any sort of hope that we might see another positive month for equity markets, with the S&P500 closing at its lowest level in over a month.
Yesterday’s improvement in US economic data appears to have reinforced the expectation that the resilience of the US economy is likely to mean that the Fed will be a lot less cautious, when it comes to further tightening monetary policy when it meets next on 21st September, when it could well go for its third successive 75bps rate hike, as it looks to drive inflation back down again.
The recent decline in fuel prices in the US does appear to be encouraging some optimism that inflation, while sticky may well have peaked in the short term, it’s also clear that far from looking to contain inflation, the Fed also wants to start pushing it back down quickly as well.
Today also sees the return of the ADP payrolls report which should offer further clues as to whether the resilience seen in the US labour market in last month’s non-farm numbers is showing similar resilience in the private sector. As such the numbers might not track this Friday’s numbers in the same way, not that they did previously. Expectations are for 300k to be added in August.
On this side of the Atlantic, as we look towards Europe there appears to be no such sign of the same thing happening, when it comes to inflation pressure showing signs of peaking.
Yesterday’s German flash CPI numbers for August saw headline inflation hit its highest levels in over 50 years at 8.8%, shifting the focus to today’s preliminary August CPI numbers from France, Italy and the EU.
The French CPI numbers are expected to slip back from 6.8% to 6.7%, although it should be remembered the French government is spending huge amounts of euros in trying to protect the French consumer from the surge in energy prices.
In Italy August CPI is expected to come in at 8.2%, while on the headline CPI number which the ECB is most interested in for the whole euro area, which is expected to rise to a new record high of 9%, shifting attention towards next week’s ECB rate meeting, and another outsize rate rise.
Another record high for EU CPI will merely serve to embolden the hawks on the governing council who have become more vocal in recent weeks.
Yesterday we heard from a succession of ECB Governing Council members calling for consideration of a 75bps rate rise at next week’s meeting
Klaas Knot, the Netherlands governing council member, and who has traditionally been more hawkish, said that he was leaning towards a 75bps move and that a move beyond the neutral rate might be required to tame inflation.
The Slovenian central bank governor Vasle also said he is leaning towards 75bps as well, not altogether surprising given headline CPI is at 11% there.
The ECB’s chief economist Philip Lane was a little more noncommittal merely saying that further rate rises were needed, however it is becoming clearer that the hawks, having been kept quiet for such a long time over the past few years, are slowly sharpening their claws.
EUR/USD – attempting to carve out a short-term base just above the 0.9900 level with resistance at last week’s high at 1.0120. We can see the potential for a squeeze towards 1.0220, but while below that the bias remains for a move towards 0.9660.
GBP/USD – the pound has continued to look soft with the bias remaining for a move towards the lockdown lows of March 2020 at 1.1500. Resistance comes in at 1.1980 area.
EUR/GBP – continues to push higher hitting its highest levels since early July, with the next key resistance at 0.8630. The current move higher has trend line support from the lows this month now coming in above the 0.8430 area.
USD/JPY – edged a little closer to the previous highs at 139 40 which are the next key resistance area and obstacle to further gains towards the 140.00 area. Support now comes in at the 137.15 area or cloud support, and below that at the 50-day SMA at 135.80.
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