Having avoided contagion from oil and emerging markets in the previous session, things now appear to be catching up to European markets that look weak heading towards the open on Wednesday before data that could confirm the Eurozone fell into deflation during November.
Multiple major money-centre banks appear to no longer be pricing USD/RUB because of the crashing ruble, cutting Russian companies and individuals off from global financing. As a major trading partner, Russia’s funding problems are expected to start hitting home in Europe.
The final reading of Eurozone CPI growth is expected to confirm 0.3% year-over-year price growth with deflation of -0.2% in November. As oil prices drop, the lowflation situation in Europe is expected to get worse before it gets better. EUR/USD at 1.20 may have been enough to trigger some inflation as imports got pricier but the drop in oil prices may have lowered that boundary closer to parity.
For the moment, the ECB pontificating over policy options (and German laws) means the falling inflation is not being met with an adequate monetary policy response. No ECB action towards lowflation poses an ongoing headwind to European stock markets but may continue to offer some respite to the euro which broke above 1.25 on Monday.
UK CPI growth came in at just 1% year over year in November, coming close to the Bank of England forecast of sub-1% within 6 months. 1% price growth will have triggered a latter from Mark Carney to Chancellor George Osborne explaining why the 2% inflation target is not being met. Despite disappointing CPI data the pound rallied yesterday with some risk having been removed from the markets after banks mostly passed stress tests and European data improved.
The Bank of England minutes will be released at 09.30 GMT and expected to show still just two dissenters over the decision to keep interest rates low. The UK unemployment rate is expected to hold at 6% while average earnings are expected to tick higher to 1.2% growth in the three months through October.
The US Federal Reserve statement and economic projections are expected at 14.00 GMT with Janet Yellen’s press conference starting at 14.30.
EURUSD – The euro saw a good move higher yesterday breaking above the 1.25 handle but reversed with a long wick off 1.2569 a few pips from the top of the range. If today’s session can hold above 1.25 that would set the stage for a trend reversal and a more substantial rally.
GBPUSD – The pound rebounded strong off 1.56 almost touching 1.58 and in doing so broke above a down-sloping trendline. The pair reversed back towards 1.5735 the interim resistance level within the range, a bounce from there could target 1.5827 the Nov 27 high.
EURGBP – The euro-sterling cross ended up with a well-formed shooting star reversal candlestick pattern right at the 0.80 round-number. This pattern could see prices fall back beneath 0.79 and the rising trendline connecting recent troughs.
USDJPY – The dollar-yen sank below 117.35 and bounced off the 115.50 level and is now re-testing 117.35 from the downside. Should 117.35 hold that could setup another drop towards 114
Equity market calls
FTSE100 is expected to open 68 points lower at 6,263
DAX is expected to open 121 points lower at 9,442
CAC 40 is expected to open 68 points lower at 4,025
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