Broader risk appetite has struggled for any meaningful traction in recent trading sessions as a mix of geopolitical concerns and some weaker than expected corporate earnings has resulted in a more cautious tone across markets. Yesterday was no different and in Europe stocks closed lower for their 5th consecutive session with the Stoxx 600 down .7% while the CAC was also down .7% with the German Dax down .4%. Things in the US were not quite as negative with the three major indices trading more or less flat on the day, the fact we’ve stayed away from pressing any fresh highs/intraday records in itself can be classed as an adverse session given the usual price action this year which has seen a continuous slow grind higher.
In currency markets, GBP faced headwinds falling to 1 week lows after a bout of selling through Friday evening and to welcome in the week as the market opened. Overnight, we saw some weaker than expected Chinese data with slightly weaker retail sales and industrial production data which weighed on sentiment, pressing the Nikkei lower. The USD has also found itself facing some weakness and even though the USD index trades just below 3 months highs, its sitting just above 2 week lows currently and it begins to press a little lower. The euro has been an outperformer, not really driven by its own merit but more by default as everything else has rationale for light selling, the single currency benefitting by default.
GBP was under pressure through much of the day yesterday and some headlines into the European close confirming that the UK Parliament would have a final vote on any Brexit bill before its passed helped GBP recover some losses. There’s no doubting the fact that GBP will continue to find itself exposed to Brexit related weakness, especially as uncertainty prevails and a hard Brexit is priced into the pound’s value. We’ll continue to see GBP volatility around Brexit sentiment. Today however, we’ll be more focused on the fundamental data and the release of UK inflation figures in the form of CPI data that is due to come in around 3.1%. The BOE are fresh off raising interest rates for the first time in 10 years and although it’s far too soon to see an impact, there’ll be concerns that even with the strengthening pound and rate hikes that inflation will continue to rise. The bulk of the price rises comes from food price inflation and core contributors but the issue for the UK is the squeeze on real wages, with tomorrow’s labour market figures showing wage growth at only 2.1%. Households now facing a 1% squeeze on their real earnings. Mark Carney will be in the bold boy’s corner as he will have to write a letter to the Chancellor to explain why inflation has risen more than 1% above target. Given the BOE’s ultra-dovish stance at the last meeting which saw GBP drop despite the rate hike, a weaker inflation print at this point is unlikely to change the bigger picture. In the past as inflation has risen this has proved positive for GBP but today we’re unlikely to see that reaction.
Now aside from UK inflation data, we have an orgy of central bankers today with Yellen, Draghi, Kurodo and Carney all sitting on the ECB panel. They are due to begin at 10am and with the leader of every major central bank likely to have their time under the spotlight, we are sure to see some volatility spread across EUR, GBP, JPY and USD. As it stands, the US are now looking like the only one of the major central banks looking at raising interest rates but that leaves the USD vulnerable and exposed. Unless US data continues to paint a solid picture, the USD will almost certainly be at risk of selling. But with Yellen’s term coming to an end in February next year, will her last actions be to raise interest rates in the December meeting?
Elsewhere Trump’s trip across the Far East appears to have gone rather well, he has already been on twitter this morning saying he will be making a major statement from the White House upon his return (no time/date confirmed).
The euro has started the day well supported following a better than expected GDP print from Germany. This saw EURUSD break above resistance market yesterday ahead of 1.1690. That should see EURUSD look to target the downtrend resistance line in place since the beginning of September, expect this to come in around 1.1730/40 region. A daily close above there and EURUSD will be looking higher towards 1.1880. 1.1660 now likely provides some support but the real support for any moves lower will be around 1.1580/1.1530 region.
EURGBP up at resistance around .8935, a break above there targets firmer resistance from .9000 to .9030 area. This is key to hold and has provided Euro sellers a good level to sell for the last three months. GBPUSD breaking lower and 1.3035/45 area provides real support. A break below there will likely open up GBP to further losses back towards 1.2800 area.