European markets finished the day lower yesterday, with nervousness over a global slowdown very much front of mind with the market very much in defensive mode as we head into the weekend.
US markets on the other hand managed to break a 5-day losing streak by finishing the session higher, despite further weakness in oil prices which saw prices hit their lowest levels this year for the second day in succession. This recovery along with a positive Asia session looks set to translate into a positive European open.
The main focus of attention continues to be on next week’s central bank meetings of the Federal Reserve, ECB and Bank of England, and guidance on the likely glide path for rates heading into 2023, as well as two important CPI reports, one from the UK, and more importantly the November CPI report from the US.
The most recent US CPI and PPI reports from October have helped shape a narrative in recent weeks, that inflation in the US has peaked, thus prompting the sharp fall in yields, and decline in the US dollar, which had until very recently been trading at 20-year peaks.
The October PPI report helped to reinforce that notion after inflation came in at 8% on the headline rate, while core prices fell to 6.7% from 7.2%. Both CPI and PPI have been rising at a progressively slower rate since the summer peaks.
The big question is whether this trend can be maintained against a US central bank that doesn’t want to be seen as going soft on inflation, and services and wages data that points to a US economy that is slightly more resilient than originally thought.
Given Powell’s comments at the Brookings Institute last week it seems certain that the Fed will be slowing the pace of rate rises next week to a 50bps hike, with today’s numbers expected to confirm this narrative with a further slowdown to 7.2% on the headline and 5.9% on core prices.
We’ll also get an insight into consumer inflation expectations with the latest December University of Michigan inflation expectations numbers for 1 year and 5-10 year, with the previous forecasts at 4.9% and 3% respectively. Will we see further weakness after 1 year fell from 5% in October to 4.9%.
EUR/USD – The euro continues to be bought on dips with support just above the 1.0400 area and 200-day SMA, while the recent highs at the 1.0610 area are capping. A move above 1.0620 targets the potential for a move towards 1.0800. Below 1.0400 targets the 1.0340 area.
GBP/USD – Still has resistance just above the 1.2300 area, with little in the way of a dip thus far, with support around the 200-day SMA at 1.2110. A concerted move through 1.2300 targets the 1.2750 area. A move through the 1.2040 area could see further weakness towards the 1.1985 area on a move below the 200-day SMA.
EUR/GBP – The 0.8675 area continues to be a key resistance, falling short at 0.8645 yesterday. We also have short term support at the just above the 200-day SMA and the 0.8540 area. Below 0.8530 targets 0.8480.
USD/JPY – Ran out of steam just shy of the 138.00 area earlier this week. A break below support around 136.00 retargets the 200-day SMA at 134.50. Above 138.00 targets the 140.00 area.
FTSE 100 is expected to open 19 points higher at 7,491.
DAX is expected to open 65 points higher at 14,329.
CAC40 is expected to open 23 points higher at 6,670.
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EUR/USD treads water just above 1.0400 post-US data
Another sign of the good health of the US economy came in response to firm flash US Manufacturing and Services PMIs, which in turn reinforced further the already strong performance of the US Dollar, relegating EUR/USD to the 1.0400 neighbourhood on Friday.
GBP/USD remains depressed near 1.2520 on stronger Dollar
Poor results from the UK docket kept the British pound on the back foot on Thursday, hovering around the low-1.2500s in a context of generalized weakness in the risk-linked galaxy vs. another outstanding day in the Greenback.
Gold keeps the bid bias unchanged near $2,700
Persistent safe haven demand continues to prop up the march north in Gold prices so far on Friday, hitting new two-week tops past the key $2,700 mark per troy ounce despite extra strength in the Greenback and mixed US yields.
Geopolitics back on the radar
Rising tensions between Russia and Ukraine caused renewed unease in the markets this week. Putin signed an amendment to Russian nuclear doctrine, which allows Russia to use nuclear weapons for retaliating against strikes carried out with conventional weapons.
Eurozone PMI sounds the alarm about growth once more
The composite PMI dropped from 50 to 48.1, once more stressing growth concerns for the eurozone. Hard data has actually come in better than expected recently – so ahead of the December meeting, the ECB has to figure out whether this is the PMI crying wolf or whether it should take this signal seriously. We think it’s the latter.
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