After a disappointing start to the week European markets enjoyed a strongly positive day yesterday, buoyed by some rather dovishly interpreted comments from ECB policymaker Ewald Nowotny that raised the prospect that ECB officials might look at additional measures to help boost inflation and growth in the euro area, as we look ahead to next week’s ECB rate meeting in Malta. While further action at this stage seems unlikely, the comments also had the effect of pushing the euro lower after it hit a six week high against the US dollar. We also have to remember that the ECB only embarked on its €60bn a month QE program in March this year, and it is still due to run until September next year, the stubbornly low levels of inflation throughout Europe has prompted speculation that we may see an announcement that could extend the program into 2017, though even that options is likely to present problems in terms of the amount of assets available. Given that expectation, markets in Europe look set to continue where they left off yesterday with a positive open, potentially round tripping all of this week’s losses, we have the final reading of September EU CPI later this morning which is expected to be confirmed at -0.1%, with core prices at 0.9%, and in the process underscore the concerns policymakers in Europe have about current low prices. In addition, we have to allow for the fact that the current bout of disinflationary pressures are being primarily caused by the current weakness in commodity prices across the globe, which means it is going to be quite difficult to see how the ECB can counter that, given that low levels of inflation are likely to prompt similar actions from other central banks, thus negating any potential exchange rate effect. As it is there are significant doubts emerging that the Federal Reserve will even be able to consider raising rates this year, irrespective of last night’s comments by New York Fed Chief Bill Dudley that a 2015 rate move was still in play. While yesterday’s US weekly jobless claims numbers came in at their lowest levels since the early 1970’s at 255k, and a rise in core CPI inflation to 1.9% can’t disguise the fact that manufacturing data continues to look ugly, and combined with the weak data seen earlier this week, from the US consumer, markets continue to price out the possibility of any move on US rates much before the beginning of next year. This belief has also received an additional boost by evidence of some significant shifting in the narrative coming out from some senior Fed policymakers, who have argued this week that the Fed should exercise patience when deciding to raise rates, given recent evidence of a weakening in the US economy. Given these splits it is hard to see how policymakers can arrive at a consensus for what would be a momentous decision of being the first rise in US rates for 9 years. No-one will want to be remembered for getting a call of that magnitude wrong. Today’s US industrial and manufacturing production data for September are expected to reinforce the disappointing narrative with declines in both of -0.3% and -0.2% respectively, both of which would be negative for the second month in succession. EURUSD – yesterday’s failure to crack the 1.1500 area could well precipitate a pull back towards the 1.1220 area in the short term, where we have the 50 day MA, delaying any move towards 1.1700. This is due to the euro posting a bearish key day reversal. GBPUSD – yesterday’s peak at 1.5510 has been the extent of the rally so far, and we really need to gain a foothold through here to argue for a move towards the 1.5630 area. The market is looking a touch overbought which could bring us back to support at 1.5420 and 1.5360. EURGBP – the unexpected move below the 0.7420 area has seen the euro push down through the 0.7380 area and could well see further losses towards the 200 day MA at 0.7270. We need to see a rebound back through 0.7420 to retest the highs at 0.7495. USDJPY – the US dollar has done what it does best here with another false break out this time down to 118.20. We need to see a move back through 119.30 to reassert the previous range or we could well see a move lower towards 116.00. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
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