Geopolitical tensions remain to the front of markets and news that China had sent 150k troops to the North Korean boarder took away whatever light breeze was holding markets up yesterday. That’s certainly not to say aggressive selling started, European stocks closed slightly lower, USDJPY declined from 111.60 back below 111.0 as the safe haven JPY found demand, while US stocks also slid into the red after a slightly positive start, but eventually closed the day slightly higher. It had been a choppy day at the best of times as markets started the week nervously, there was a large amount of data and central bank speakers throughout last week, not to mention the US missile strikes on Syria and Monday felt like nobody wanted to take a position.
In Europe attention was on France, Le Pen is closing the lead on Macron however at this point it would still seem like an insurmountable gap to close. The Euro however showed some weakness as it is exposed to the election outcome, EURUSD initial trading lower on the day before rallying later in the US session as the some comments crossed the wires from the ECB’s Vice President Constancio speaking in Brussels. EURGBP traded a narrow range and GBP will find itself exposed to CPI inflation figures today. Overnight sentiment remained subdued, Janet Yellen spoke and while she has failed to show much market moving sentiment in her talks, the slightly dovish tone led to a stronger yen and a weaker USD, while concerns around US/North Korea relations kept investors at bay, and the USD was broadly weaker across through the first 36 hours of the trading week.
UK CPI headlines the morning session and this leaves the GBP pairs exposed. Headline CPI is expected to remain unchanged at 2.3%, however concerns UK inflation is far exceeding BOE estimates provides the pound with one of the few opportunities for some uplift, especially as Brexit negotiations begin to pick up pace and economic uncertainty grows. The BOE expects inflation to reach 2.9% by year end, however indications it is getting there faster than that may see increased calls for the BOE to raise rates which would be to the benefit of GBP.
The BOE remain stuck between a rock and a hard place, they want to remain accommodative to help against downside risks of Brexit, but they are also facing criticism that they acted too soon cutting rates, increasing GBP weakness and leading to the rapidly rising inflation environment we find ourselves in. Should CPI rise to 2.5% or greater, I would expect to see a significant rally in GBP pairs. GBPUSD remains well supported above 1.2366 area, a break below there opens real downside towards 1.2100 while any rally higher should first run into sellers towards 1.2500. EURGBP found overnight resistance around .8540 which is currently being tested. Firmer resistance to move higher is lined up towards .8580/90 area and I would expect to see that hold move higher for now. To the downside we have support at .8520/12 region, .8485 and firm support at .8466 where I would expect a bounce. A break below there would really target the lows towards .8320.
ZEW Economic Sentiment surveys and Industrial Production headline the Eurozone calendar this morning, while in the US session data is very light with only JOLTS jobs data and a Q&A session from the Feds Kashkari to get excited about. We are unlikely to see too much follow through from the European data, we have seen Eurozone figures improve in recent months but the primary focus for the region continues to be on the French elections. So as Le Pen tries to close the distance on Macron, the euro remains vulnerable. EURUSD is still looking to test back towards those firmer support levels around 1.0530/1.0500 area, 1.0570 hold for now but again I expect buyers lower. 1.0680/1.0700 area offers the first area of major upside resistance where sellers will likely emerge.