The party continues in US stocks as they smashed higher on optimism following Trump’s State of the Union speech. While not an official State of the Union as he has not been in office one year, he continued his mantra of promised tax cuts and a $1 trillion infrastructure spend, as well as deregulation in the finance sector, this sent stocks soaring into the stratosphere. In reality there was very little new, and nothing to give us colour on how exactly all this will be achieved but markets are not looking for anything concrete it seems. The higher it goes the more questions people are asking and while I do not doubt we have higher to go, the rationale eludes me.
The FOMC are firing all cannons as well, we regularly comment that if we are to see the Fed raise rates (in any meeting) we need to see all FOMC members singing of the same hymn sheet and hammering out rate hike rhetoric (which we are currently seeing), we also need the markets to believe the rate hike will happen (they are shifting that way with probability up to 66% from 32% on Monday) now we likely just need data to play along and give the final push. The USD index pushed to 7 week highs on rising rate hike expectation, and the greenback was dominant across the board throughout yesterday. Today, only jobless claims are on the calendar so we may well see some respite, ahead of services PMI data and another round of Fed speakers with Evans, Powell, Fischer and Yellen all due across the wires, the latter and Fed Chair speaking on economic outlook in Chicago. USD likely a buying opportunity should we see a pullback today.
It’s not just the US basking in positivity, even this morning as I am typing this report alarms are ringing across my platform signaling fresh highs in the Dax (22 month highs), CAC (15 month highs) and FTSE just straight up record highs. There is little doubt that there is great optimism out there but with plenty of event risks lining up, are the markets setting themselves up for failure? We will see Article 50 triggered by the end of this month, over the next 4 months we have key elections in Holland, France and Germany, as well as serious concerns about the banking system, most notably in Italy but also across Europe, while also watching Greece gasp for breath every couple of years as the noose of the debt burden draws tighter, the stool long ago kicked away by the Troika. I’m not trying to be pessimistic, just weary of large risks to stability that seem to be discounted in the current environment, our position here is not to say everything will be ok, but to highlight potential risks our clients could be exposed to should the current scenario shift.
Back to currencies and GBP has been under considerable pressure the last two days, again Article 50 sentiment weighing on the pound with GBPUSD down to 6 week lows, while GBPEUR trades at support in line with 4 week lows, (4 week highs and resistance in EURGBP). GBPUSD sits on support above 1.2262 area, and previous support towards 1.2385/1.2400 area will now offer upside resistance. A break back below 1.2262 will likely favour a bigger decline back towards 1.2075 and then 2017 lows just below 1.2000.
Yesterday EURGBP broke above a band of various moving averages that had helped keep it below .8550 since early Feb, we now trade just below the .8592 high we saw Feb 17th before quickly selling back sub .8400 area. A failure to break above here should see us move back towards .8500, but a break above favours .8640/70 area. Since the 12th of February we have seen several attempts by EURUSD to break and hold above 1.0630 area, almost without exception every move was sold into and EURUSD subsequently retreated lower and now we since back at key support around 1.0500/25. This area has historically offered support for EURUSD and we’ll need a break below here to see a move back towards lows but for now that range stays in play, between 1.0500 and 1.0630.