Risk appetite was subdued through yesterday as markets assessed the probability that major central banks, most notably the ECB and Fed, are on the path to raising rates. Comments from the ECB on Tuesday still reverberated around markets through much of yesterday’s session, the fact the ECB are even discussing how they might exit their easing program has been taken as a sign they are looking to end it, which helped the Euro rally firmly Tuesday evening. This was bad for European stocks through much of yesterday but doubts about the ECB’s discussion began to creep in and the single currency faced some selling as a result. One would hope that the ECB had some form of exit policy in place to ease out of a period of record accommodation, but that does not mean its going to happen right away.
We saw the Fed continue with taper talk for well over a year before we had any tightening action from them and the ECB still have the potential to ease further, as we continue to see ECB rhetoric suggesting this, even yesterday the Bank of Italy’s Panetta suggested the ECB could adopt new tools to ensure accommodative policy; certainly not the dovish rhetoric we’d expect to hear from a central bank looking to end easing. The Eurozone is far from out of the woods, and while green shoots have been showing for over a year, growth progress has been slow and inflation remains a weak sticking point while the financial system remains fragile. PMI data released this week was mixed, the services figures marginally better than expected but still just above the 50 contraction/expansion level (posted 52.2 while the UK’s was 52.6), hardly convincing of a booming recovery to end current easing. Retail PMI data headlines today’s calendar but EURUSD remains in its broader range, between 1.1130 and 1.1330. Unless we see a break above either extreme EURUSD will likely continue its directionless rambling.
The USD maintained its bullish positioning ahead of tomorrow’s Non-Farm Payrolls. Non-Manufacturing ISM data was far stronger than expected on the data front, posting 57.1 vs 53.0 expected and on the whole the headline figures from other US data was positive. Durable goods and factory orders both beat expectations but the only thorn in the days release was a weaker than expected ADP. We often look to this report for guidance on the Friday NFP figure, and while there is little correlation in the figures it serves more of a guide around NFP sentiment. ADP showed 154K jobs added through September vs 165k expected, down from 177k through August and with markets looking for 170k from the NFP, there may be some caution going into Friday’s report. Jobless claims highlight today’s US calendar but with nothing in the way of major data, focus will remain on tomorrow’s release, and any potential Fed rhetoric.
GBP is looking interesting from a technical point. Obviously last week’s announcement from PM May stoked the Brexit fear fires once again and resulted in GBP selling but we remain none the wiser as to how this will proceed. Speculation that a hard line will be taken by both parties is the primary fuel for this fear, but from a GBP perspective has anything changed? Not really, and the added bout of sterling selling has once again put GBP pairs into oversold territory from a technical perspective. We saw the pound rally against both the Euro and USD through yesterday, as better than expected PMI data and comments from the BOE’s Broadbent helped stem some of the selling in GBP. We’ve had a week of better than expected PMI data from the UK but much of that has gone unnoticed as sterling was lost amidst the panic. Broadbents comments admitted the economy had performed better than many expected post Brexit, but the fact little has changed yet means the longer term impact could be much different. The BOE had previously commented that they would be willing to ease further if required, but this is unlikely to happen in Novembers meeting given recent data and as such sterling still carries some ability to rally from these recent long term lows.