European markets saw a decent rally yesterday, following on from a positive Asia lead, as they posted only their third positive day this year, and the FTSE100 its fourth and best day, on the back of what can only be described as some “goldilocks” Chinese economic data.
This data helped encourage expectations of further Chinese stimulus, and also a brief rebound in oil prices on top of an oversold market, which prompted a brief respite from some of the recent negative sentiment, however that tonic doesn’t appear to have gained much traction in Asia this morning, as we look to open sharply lower this morning, as oil prices once again slid sharply
The inability of US markets to hold onto most of their gains yesterday was the first clue as oil prices slipped back off their highs once again. Furthermore it is this inability to sustain rebounds for any length of time that continues to gnaw away at investor sentiment in the short term, and keep the pressure on the downside.
While currency markets already held a certain degree of scepticism when it came to so called forward guidance on interest rates from the Bank of England, yesterday’s events officially shredded any vestige of credibility left in the policy.
Already dubbed the “unreliable boyfriend” by an MP on the Treasury Select Committee, Bank of England governor Mark Carney flip flopped again. Having hinted throughout most of last year that a rate rise was on the cards in 2016, amidst widespread scepticism, it wasn’t really too much of a surprise to markets that expectations got pushed out again.
It was only just over two months ago on the 5th November that he was quoted thus: “would I rather have the majority of the British people thinking that rates are likely to go up in the next year, which is the case today? Yes I would, because that is reasonably prudent behaviour, given the progress this economy is making.”
This always seemed highly optimistic on his part at the time, and sure enough here we are just over two months later and the Bank of England is starting to get the reputation of the dog that won’t bark. Every time the prospect of a possible interest rate rise looms into view like a mirage in the desert, as soon as you get closer, it moves further way.
While it is no surprise given some of the weakness in recent data the inconsistent messaging from not only the Bank of England governor, but MPC officials speaks to policymakers having about as much clue as the rest of us when it comes to the timing of a rate increase, begging the question as to under what circumstances would they raise rates and whether markets would believe any future guidance in that direction, if they were leaning in that direction.
As a result of this continued policy drift the pound has slid sharply in recent weeks against the US dollar and from experience when the pound starts to slide it can be very difficult to stop, with sterling on course to finish sharply lower for the third month in a row.
It’s been over 30 years since the pound ended a month below 1.4150, and given the current direction of travel there is a very real chance we could well see further sharp losses in the months ahead towards 1.3500 unless something causes the US dollar to suddenly weaken sharply between now and the end of the month.
On the evidence front, Mr Carney said he wanted an indication that prices were rising, and that core inflation in particular was ticking up. Since July last year core prices have been doing precisely that, from lows of 0.8% to 1.4% yesterday, an 11 month high.
In a busy week for UK data we get the latest look at the labour market with the latest ILO unemployment numbers which are expected to remain at 5.2% for the three months to November, though wage growth (inc bonuses) for the same 3 month period is expected to slow further from 2.4% to 2.1%.
In the US we will be getting the latest December CPI numbers which could give additional clues as to whether the Fed might be inclined to push interest rates up again in the coming months. Core prices are expected to rise 2.1%, up from 2%, while headline CPI is expected to come in at 0.8%, up from 0.5%.
EURUSD – continues to remain supported just above the 1.0800 area and capped just below the 1.1000 level. Only a move back below 1.0800 argues for a retest towards the 1.0600 level where we have trend line support from the all-time lows posted in October 2000 at 0.8220. A break below 1.0600 could see a return to 1.0465 and last year’s low.
GBPUSD – the pound has continued to remain weak falling below its 2010 lows at 1.4225 and below 1.4200 to 1.4125. The next support lies near the 1.4000 area but we are currently hugely oversold, which makes us susceptible to short squeezes. We need to recover back through 1.4230 to stop the rot and stabilise for a rebound towards 1.4500.
EURGBP – continues to look well supported for a return to the 200 week MA at the 0.7900 level, after breaking through the 0.7500 area last week. Currently capped near the 0.7710 level. Pullbacks are likely to find support back near the 0.7500 area.
USDJPY – the recent rebound from the 116.65 area has so far struggled to overcome the 118.30 area needed to suggest a return towards the 120.00 area. While below 118.40 the risk remains for a return to the 116.00 area.
Equity market calls
FTSE100 is expected to open 125 points lower at 5,751
DAX is expected to open 254 points lower at 9,410
CAC40 is expected to open 106 points lower at 4,166
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