Another record finish for the S&P 500 last night, but US stocks struggled to kick on strongly after Wednesday’s Fed induced move higher. The unexpectedly dovishness of Fed policymakers more or less gave the green light for low rates for the foreseeable future.
Fed officials appeared to be dismissive of concerns about rising inflation, as the goldilocks scenario of low rates and a slow improving economy continues, with markets unmoved by continued geopolitical concerns, and the rising price of oil, as Brent hit a nine month high.
Against that backdrop stocks look likely to remain underpinned, though trading today is likely to be cautious as we head into the weekend, given what could unfold over the weekend in Iraq.
Europe’s markets look likely to continue to trade in a mixed fashion, with the German DAX back near to this month’s record high, and the Spanish IBEX 35 making new multi-year highs. The FTSE 100 continues to lag behind, along with the French and Italian markets.
For today Europe looks set to open mixed, with the main economic focus set to be on the latest UK public finance numbers for May, which are expected to deteriorate even further.
Expectations are for a number of £12bn, a big increase on April’s £9.6bn, but despite this markets continue to drive the pound higher, even more so given that the Bank of England now looks even more likely to be the first central bank to increase rates, unless the Federal Reserve undergoes a similar chameleon like Carney moment in the coming months.
Even a slightly disappointing retail sales number for April yesterday failed to dampen sentiment, as expectations of a rate rise this year continued to increase, driving the pound to fresh multi year highs against the US dollar.
While a rise in borrowing is unwelcome it would appear that markets are more focussed on the economic recovery as CBI data showed industrial order books reach an eighteen year high yesterday, giving rise to concerns that the strength of the pound could hit exports.
While the strength of the pound could well be a concern, this tired argument that it will somehow hit exports lacks credibility, given that when the pound was trading at $1.50 we didn’t see an export boost. Of course it will put upward pressure on margins, but the flip side of that is it helps bring inflation down on the input side, and eases pressure on margins that way.
EUR/USD – having broken above the 1.3580 area the euro looks set for a move towards 1.3675. The 1.3580 area should now act as support. If we move below 1.3480, the lows this year, we also have key trend support from the 2012 lows at 1.2045, which now comes in just above 1.3450.
GBP/USD – having moved through the 1.7000 level and making a new six year high at 1.7062 the bias now shifts towards a move towards 1.7330, which would be a 50% pullback of the decline from the 2007 highs at 2.1160 and the lows at 1.3500 in 2009. For now we have intraday support at 1.6990 and then below that at 1.6910, while the major support lies all the way back at the 100 day MA at 1.6700.
EUR/GBP – yesterday’s pullback found resistance at 0.8025, and we need to push beyond 0.8035 to retarget the 0.8085 area. Support remains near the lows at 0.7960 and while this holds we remain at risk of a further pullback, with a slightly bullish daily candle this week.
The pressure remains on the downside while we remain below trend line resistance from the March highs sitting just below the 0.8110 level, with a longer term target at 0.7880.
USD/JPY – the next support remains around the 101.60 area and the 200 day MA, after last week’s move below 101.80, with a move back through the 200 day MA retargeting the range trade lows of last week near 101.00. The range highs remain anywhere below the 103.00 area and last week’s high at 102.75.
Equity market calls
- FTSE 100 is expected to open 4 points higher at 6,812
- DAX is expected to open 2 points lower at 10,002
- CAC 40 is expected to open unchanged at 4,563
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