Stocks in Europe look set for a mixed open with shares in the UK and France slipping back slightly whilst those in Germany edge forward. The Fed-fuelled rally that catapulted shares out of the summer doldrums this week is showing some signs of fatigue.
The immediate reaction across markets to the Fed’s decision to keep rates on hold again has been that of lower treasury yields, higher stock prices and a weaker dollar. This reflects an understanding that the Fed isn’t about to raise rates for at least three months. It could easily be longer if US economic data remains sluggish.
Focus will now begin to switch to upcoming economic data and whether that makes a rate hike in December more or less likely. On Thursday the economic reports were mixed with jobless claims dropping to a two-month low but home sales seeing a surprise decline. The US Markit manufacturing PMI is released on Friday.
While the longer period of policy accommodation from the Federal Reserve and the Bank of Japan is welcome, markets will struggle to shake off the sense that central banks are reaching their limits. For the US dollar to continue to depreciate it first has to overcome some sticky price barriers in 100 on USD/JPY, 1.14 in EUR/USD and 1.34 in GBP/USD.
The British pound has already retraced a good amount of its Fed-related gains as concerns re-emerged about the Bank of England’s plans to cut interest rates again. The BOE’s Forbes has been the first to admit growth in 2017 may be faster than expected and that she is unconvinced for a need for a further rate cut.
The rally in the euro has faded with Mario Draghi not discussing monetary policy ahead of the release of French GDP and French, German and Eurozone September PMIs on Friday. The preliminary Eurozone composite PMI is expected to slip slightly to 52.8 from 52.9.
EURUSD – The euro remains stuck in the middle of its 1.11-1.13 trading range.
GBPUSD – Cable rallied for two days from its long-term rising trendline and 78.6% Fibonacci of its rally from multi-decade lows at 1.2950. Gains have stalled above 1.31 and the pair could try to re-test 1.30.
EURGBP – Euro-Sterling has been trading sideways beneath 0.86 after pulling back from 0.8630, the July 6 peak. There is scope for a long-term head and shoulders.
USDJPY – Dollar yen is pulling back from 101.20, the Sept 7 low. The downtrend needs to break 100 to be sustained.
Equity market calls
FTSE100: to open 9 points lower at 6,902
DAX: to open 2 points higher at 10,676
CAC40: to open 6 points lower at 4,503
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