Last week saw another positive week for markets in Europe, the third in a row with the FTSE100 pushing up to a 2-month high before slipping back, while the DAX managed to close at a new record high, despite the German economy stagnating in Q2.
With price pressures in Germany and the US showing signs of slowing more than expected in the last couple of months there is a sense that last week’s rate hikes by the Federal Reserve and the ECB may well have been their last.
We’ve heard several ECB policymakers expressing increasing caution over the growth outlook, which appears to be tempering enthusiasm for more aggressive rate action, while some US policymakers are becoming more optimistic about the glide path for inflation, with Minneapolis Fed President Neel Kashkari commenting at the weekend that the US could avoid a recession, although he was careful not to sound too dovish.
For now, stock markets appear to be buying into a soft-landing narrative when it comes to the US economy, with US markets closing higher for the 3rd week in a row with the Dow, S&P500 and Nasdaq 100 all posting their highest weekly closes since January 2022.
As we come to the end of another positive month for both US and European markets there is still little sign of the sharp move lower that many have been expecting over the last few months.
This so-called “wall of worry” that has characterised most of the gains since the big March sell-off has thus far shown little sign of coming to end, despite bond yields which have as yet remained close to their highest levels since 2007.
Even Friday’s move by the Bank of Japan in tweaking its yield curve control policy failed to have a lasting impact, with the yen finishing the day lower, after losing ground initially, although yields on JGB’s did hit their highest levels in 9 years.
The US dollar also had another positive week rallying for the 2nd week in a row, benefitting largely due to the US economy’s ability to withstand the higher rates that have been pushed through by the Federal Reserve over the last 16 months.
With the ECB indicating that a “pause” might be coming when the governing council next meets in September, today’s latest flash EU CPI for July could go further in reinforcing that narrative after Friday’s slowdown in German inflation.
Headline CPI is expected to slow to 5.3% from 5.5%, while core prices are forecast to slow to 5.4%.
On the growth front EU Q2 GDP is expected to move back into positive territory to 0.2%, after two negative quarters.
It’s also a big week for the pound with Thursday’s Bank of England rate meeting, where we can expect to see another rate hike of 25bps at the very least, with an outside chance of a 50bps move.
Markets are still expecting a much higher terminal rate for the BOE, well above the current 5%, although it is now well off the peaks of a few weeks ago when it was well above 6%. Even at current estimates of just below 6%, it still seems way too high.
Much could depend on the strength of today’s consumer credit and mortgage lending data for June which is expected to show further weakness. Mortgage approvals are expected to slip back below 50k to 49k, while net consumer credit is forecast to remain steady at £1.1bn.
Given current levels of wage growth a hold from the Bank of England is unlikely, even if many people think they should pause. If the Bank of England is sensible this week, they will temper any reaction to over-react and we will probably see a hawkish hike of 25bps, given the uncertainty ahead of the July CPI numbers which are due 16th August. Current expectations are for a sharp slowdown which in turn could future rate expectations fall further.
This week also has the July Friday’s US payrolls report to look forward to along with a whole host of US labour market data with the ADP report also in focus after June’s bumper 497k number, as well as June JOLTs job openings.
EUR/USD – found support at the 1.0940 area last week with further support at the 50-day SMA as well as the 1.0850 area. Resistance currently at last week’s high at 1.1150.
GBP/USD – slipped back from the 1.3000 area, last week with next support at trend line support at 1.2710, and the 50-day SMA at 1.2700. While above this key support the uptrend from the March lows remains intact.
EUR/GBP – struggling to rally, finding resistance at the 0.8600 area, with the risk of a return to the recent lows at 0.8500/10. Above the 0.8600 area targets the July highs at 0.8700/10.
USD/JPY – Friday’s rebound from the 138.00 area and cloud support could extend back towards the 142.00 area. While below the bias remains for a move lower, however a move back through 142.20 could trigger a move back to the 145.00 area.
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