Stocks in Europe traded higher through yesterday bouncing back from Mondays’ declines with commodity linked stocks helping indices higher as the weaker USD favored demand for metals and crude, driving their related stocks higher. The USD fell back from 7 month highs through Monday and although we saw it trade slightly higher into the afternoon yesterday, it still failed to recover and remains down on the week thus far, with US data beginning to show signs of waning as CPI figures showed inflation remains well below target, with little signs of moving. It was a different story in the UK, the CPI inflation reading was firmer than expected as the bite of a weaker sterling feeds into prices, with fuel, food and clothing adding to the rise in price growth. The pound traded higher as a result as expectations the BOE would have less room to ease further as they monitor inflation. Overnight sentiment was mixed, Chinese stocks traded higher. Some weaker Chinese industrial production data was marginally offset by firmer retails sales while GDP reading for Q3 came in as expected. A stronger JPY overnight had little bearing in the Nikkei which traded moderately higher, while European stocks are slightly risk off and in the red to start the morning.
GBP was one of the bigger movers yesterday with GBPUSD rallying above 1.2300 before running into selling at 1.2320 area, and EURGBP dropping towards .8900 as sterling demand drove away recent weakness. We highlighted the potential for these moves yesterday as we expected inflation to overshoot recent estimates and with that will then pose a problem for the BOE. A survey of economists from Bloomberg suggest the majority expect the BOE to cut rates further in their November meeting however with inflation quickly rising, the BOE may have to rethink their policy, it is also likely they will consider saving some ammunition for what is going to be a long period of negotiations around Brexit. On that front we also had some news yesterday following a high court case, comments from a Government lawyer who suggested it was “very likely” that parliament would have to ratify the countries exit agreement with the EU. Today we have labour market data from the UK, on the whole UK data has been supportive of growth and should we continue to see data support this outlook, even in the midst of Brexit Turmoil, the pound still has scope to bounce. 1.2328 area continues to offer resistance higher in GBPUSD, with 1.2445 area key resistance above that. EURGBP still has potential to fall as low as .8830, but yesterday’s lows above .8910 hold for now.
The USD, sitting just below 7 month highs and on expectations the economy is growing fast enough to hike interest rates by year end, is open to some vulnerability to weak data. We keep highlighting that not only do the Fed need to convince markets they are ready and willing to raise rates, but the data has to support this also. Inflation is not a reading the Fed are taking into consideration when hiking rates, it is a factor but their primary outlook is on the labour market and broader based confidence. That being said should inflation remain persistently low, there is certainly a reasonable argument against hiking too aggressively. In fact US data has wobbled somewhat this month and while Fed rhetoric remains supportive the greenback is exposed to these weaker data points. With that, housing data due today will take some focus but greater attention will be on the Fed’s Beige book of economic activity, to provide a broader picture of the health of the US economy.
The Euro has faced a mixed week thus far, a stronger USD last week saw EURUSD trade back below 1.1000 where it has more or less held so far, the Euro was also under pressure from a stronger pound and all eyes will now be on tomorrow’s ECB policy meeting and press conference. There is no expectation of change from the ECB, who have been battling hard to wind in the “taper” comments from a few weeks ago, which led markets to believe the ECB could be looking to remove their accommodative policy in the near future. We don’t believe this is the case, in fact we would not be surprised to see the ECB extend their current program but details of this are unlikely to be revealed any time soon, as the ECB prefer to play the “wait and see” game. I would expect to see them re-enforce their ability to ease further, while not actually committing to anything and I think we will get some clearer clarification on the tapering comments. EURUSD support below 1.0940 remains the major level, a break below here and we fall into the lower range for EURUSD with last year’s lows then attracting.