It was a quiet start to yesterday and risk started the day tentatively, the European open remaining cautious following a weaker open to the week in Asia. It didn’t take long however, for European stocks to press higher with the STOXX 600 up .7% to 15 month highs. Both the CAC and DAX also pressed to the highest levels seen since mid-2015, with the Netherlands bourse, the AEX also trading to its highest level in 9 years. The reason I am mentioning this is it emphasises the weight of geopolitical risk and recent tensions and with Mark Rutte winning the Dutch elections and Macron taking a significant lead over Le Pen in the French polls, it would seem that for now, the far right parties will be held at bay and markets are taking a sigh of relief. The Euro also enjoyed the relief of pressure, EURUSD trading as high as 1.0799 this morning. 1.0834/55 area offers firmer resistance than psychological 1.0800 area and we may see a press to there before a reversal.
The pound faced some selling off three week highs as PM May announced that Article 50 would be triggered on March 29th and so will begin the 2 year (at least) divorce battle. In the US the dollar had traded slightly firmer through the early session before selling off, a number of Fed speakers had crossed the wires and while the general comments continued to support the “three rate hikes in 2017” view, there was less urgency from those speaking now they got one out of the way. In the US stocks fell, a combination of fatigue perhaps, as well as comments suggesting Trumps Fiscal and tax plans may take longer than expected knocked appetite, while FBI Director Comney also testified to Congress that there was an active investigation into the President’s campaign and potential links to Russian government. Overnight the Nikkei fell, a stronger JPY and weaker USD as yield fell, also saw financial stocks under pressure adding to the selloff. We also saw some selling in AUD following the releases of the RBA minutes where comments directly on the strength of the rising value of the AUD suggested too much strength could complicate economic transition. Thus far in Europe however, we remain on the green platform.
It’s a big day for GBP and thus far the pound is enjoying some demand ahead of the CPI inflation reading and Mark Carney also due on the wires. We continue to point towards an inflation as one of the few areas that may provide GBP with some strength. Today, inflation is expected to rise above the 2% target the BOE have in place, and it is expected to continue higher through 2017 as the weaker GBP feeds through into prices, impacting the consumer. We have already seen consumer sentiment drift lower and food and fuel prices are impacted and this has already shown signs of feeding through into retail sales, as the consumer quite simply has less in their pocket. However, should inflation continue to rise faster than expected we may see the BOE forced to act. Now it will likely take a considerable fast paced rise to put the BOE under this pressure and unless we see inflation above 3% by Q3, the BOE are likely to be content to wait and see as broader Brexit uncertainty impacts the economy. Thus Carney may well douse any GBP rally should inflation print above the 2.1% headline expected. GBPUSD still offers an attractive buy on any rally, interim resistance around 1.2435 area hold for now, above that 1.2482 offers next serious level. EURGBP find downside support towards .8660/65 area and needs to break below this to if the bears are to have any chance. Sellers towards .8800 should hold and surge higher for now.