eur/gbp

EUR/GBP has gained over 1% in the same period of time and USD/CHF seems to be unchanged. USD/PLN after a significant weakening of zloty at the beginning of the month switched to a downtrend. USD has weakened after rumours of a ceasefire, so the pair has fluctuated. However, the Russia-Ukraine conflict is not ended yet and the situation on the markets is uncertain. Many assets are more and more volatile and investors wonder what should be their next moves. One of the questions is how long will Europe depend more on the own currency than on USD. EUR/USD Chart – Monthly EUR/GBP Chart – Monthly USD/CHF Chart – Monthly USD/PLN Chart - Monthly Source/Data: TradingView.com Charts: TradingView.com

EURGBP is overall bearish and approaching the upper brown trendline so we will be looking for Trend-Following Sell Setups As per my trading style/plan; Here are the two strong zones where I will be looking for high probability buy setups: I call them War Zones, (highlighted in Purple circles) Zone 1: (around 0.85) This highlighted purple circle is a strong area to look for sell setups as it is the intersection of the green resistance and upper red trendline. (acting as non-horizontal resistance) Zone 2: (around 0.83) This highlighted purple circle is a strong area to look for buy setups as it is the intersection of the blue support and lower red trendline. (acting as non-horizontal support) As per my trading style:As EURGBP approaches one of the purple circles, I will be looking for reversal setups (like a double bottom /top pattern, trendline break , and so on...) Always follow your trading plan regarding entry, risk management, and trade management. Good luck! All Strategies Are Good; If Managed Properly! ~Rich

Summary: The Euro claws back marginally against the USD. UK CPI inflation data knocks the Pound Sterling against both the Euro and The USD. USD/CAD bearish. Read next: (EUR/USD, EUR/GBP) Euro Strengthens In The Wake Of Villeroys Comments On Monday, (AUD/JPY), (GBP/USD) Pound Sterling Showing Strength - Good Morning Forex!  EUR showing signs of potential recovery Market sentiment for this currency pair is showing bullish signals on Wednesday. The Euro gained 1.1% on the USD overnight, however it lost more than 0.3% during the trading day on Wednesday. In general, investor confidence has been returning to the market, this has been helped by the fact that U.S retail sales rose in April. It seems as though the Fed will continue to tighten monetary policy in conjunction with expectations that the European Central Bank (ECB) will turn hawkish after representative Klaas Knot suggested an interest rate hike is on the table. EUR/USD Price Chart UKs CPI Inflation knocks the Pound Sterling The market sentiment for this currency pair is showing bearish signals. The Euro has gained on the GBP after UKs headline CPI inflation rate came out at 9% for April, which beat market expectations, however is still up 2% from March. The most recent data for the UK economy did not shock the markets, therefore, the long-term effect of this data is unlikely to have a big effect on the Pound Sterling. At the last policy-setting meeting, the Bank of England (BoE) pushed interest rates up by 1%, the recent CPI inflation data suggests that the BoE will likely need to continue tightening their monetary policy. EUR/GBP Price Chart USD/CAD currency pair The USD/CAD currency pair is signalling bearish market sentiment, this bearish sentiment is not expected to continue for long in the future. With the hawkish Fed fighting inflation, the USD is expected to get stronger going forward. USD/CAD Price Chart Pound Sterling loses to the US Dollar The market sentiment is showing bullish signals for this currency pair, however the GBP has weakened against the USD on Wednesday. The weakening of the Pound Sterling comes after the release of CPI inflation data. GBP/USD Price Chart Read next: (EUR/USD, EUR/GBP, EUR/CHF) ECBs Hint To Raise Interest Rates Offers Some Relief For The Euro - Good Morning Forex!  Sources: finance.yahoo.com, dailyfx.com, poundsterlinglive.com

Summary: The market sentiment for the EUR/USD currency pair turns mixed. Inflation and economic data weighing on the GBP. BoJ continues to fight rising interest rates. AUD strengthens amidst favourable unemployment data. The market seems to be favouring the Euro for a change The market is signalling mixed market sentiment for this currency pair. The U.S dollar lost ground to the EUR during Thursdays early trading, however, the demand for the safe-haven asset remains steady due to investor risk sentiment still being fragile. Earlier this week the Fed announced they would push interest rates as high as necessary to fight the surging inflation. On Thursday the market is waiting for the minutes from the latest European Central Bank (ECB) meeting to be released, hoping there will be an indication of a tightening in monetary policy. Read next: (EUR/USD) Hopes Of A Hawkish ECB Shows Favour To The Euro, (EUR/GBP) UK CPI Inflation Data Knocks The Pound Sterling - Good Morning Forex!  This begs the question: despite the Fed's already hawkish monetary policy, why is the market not pricing in much for the hawkish Fed, but pricing in a lot for the European Central Bank (ECB) ? EUR/USD Price Chart BoE and ECB expected to raise interest rates The market is reflecting a mixed market sentiment on Thursday. Earlier in the trading week, UK economic data releases weighted on the value of the Pound Sterling, global investor sentiment and the current equity bear market are both aspects that could mean further losses for the GBP. Earlier on in the trading week, the GBP gained on both the Euro and the US Dollar, but a midweek sentiment turn around has bought the Pound Sterling back down. Both the ECB and the Bank of England (BOE) are expected to raise interest rates. EUR/GBP Price Chart Follow FXMAG.COM on Google News! USD continues to beat the JPY The Japanese yen seems to be an underperformer in the past week, perhaps this is due to the rising U.S yields by the Fed amidst the Bank of Japan (BoJ) fighting against tightening their monetary policy. Should the market face a big risk-off sentiment, the JPY might see some gains, however in this currency pair, it may not be noticeable due to the USD also being seen as a safe-haven currency. USD/JPY Price Chart AUD regains some investor confidence Market sentiment for this currency pair is bullish. Investor confidence has increased in the Australian Dollar after the unemployment rate for April came in at 3.9% which not only exceeded market expectations but is also the lowest rate since the 1970s. AUD/JPY Price Chart Read next: (EUR/USD, EUR/GBP) Euro Strengthens In The Wake Of Villeroys Comments On Monday, (AUD/JPY), (GBP/USD) Pound Sterling Showing Strength - Good Morning Forex!   Sources: finance.yahoo.com, dailyfx.com, poundsterlinglive.com

Summary: German CPY (YoY) CPI inflation data met market expectations. Looming european energy crisis. Initial market reactions. German CPI inflation data comes in at 10% Preliminary estimates showed that in September 2022, Germany's consumer price inflation spiked to 10 percent year-over-year, the highest level ever and significantly more than the 9.4 percent market projection. Following a worsening energy crisis in the biggest economy in Europe and ongoing supply chain disruptions, consumer prices have been rising. The German CPI inflation data was forecasted at 10% and came in at 10%, in addition the German CPI (MoM) data also met market expectations and remained equal to the previous months at 1.9%, this indicates that the largest European economy has not worsened despite fears. With the war in the Ukraine continuing, and the sanctions placed on Russia by the European Union, it is no secret that the European economies are facing problems, driven by a looming energy crisis. With winter approaching and a shortage of gas forecasted, prices have been rising. The European Central Bank’s (ECB) interest rate hawkish interest rate hiking cycle is showing no signs of slowing down, Inflation data from Europe's largest economy tends to be a clear indication of the performance of the rest of the European Economies. In the wake of the previous German CPI inflation data release, separate statistics revealed that previously, consumer and business expectations for greater inflation and a worsening financial situation caused the euro zone's economic mood to decline significantly and more than anticipated. The effect of the CPI Inflation Data on the Markets As CPI inflation continues to rise, consumer confidence continues to fall, the actual figures set up a strong case for the European Central Bank to continue on their interest rate hiking cycle path. The initial effect of the released data caused the EUR/USD to strengthen slightly, the EUR/GBP had the same effect, strengthening as the German Inflation rate remained high, yet stable. Sources: investing.com, reuters.com, dailyfx.com

European markets finished the day lower yesterday, despite a softening in yields which was brought about by comments from St. Louis Fed President James Bullard that he envisaged a Fed funds rate of 5.37%. This is broadly in line with the Minneapolis Fed's Neel Kashkari who has consistently indicated a more hawkish stance of 5.4%, although this a slightly more benign stance than markets had started to price in over the past few days. Notwithstanding that, last night's Fed minutes didn't tell the markets much that hadn't been deduced already given the recent comments from Mester and Bullard last week. What they did show however was that there was significant sympathy for a 50bps rate hike from a few FOMC members before they settled on the more gradual option of a 25bps rate rise. Fed officials were also at pains to cite continued inflation risk, which suggests contrary to the narrative that followed the Powell press conference that the Fed is far from done when it comes to raising rates further. A lot of the takeaway from the minutes last night was that they didn't provide a lot of new information. That isn't entirely true, given that we now know that a number of other Fed officials share the view of Bullard and Mester that more needs to be done, and in light of the data since then that position will only have hardened further. Without last week's interventions these minutes would have been considered extremely hawkish, and with the interventions they now show that the Federal Reserve has further to go, with another 25bps in March, followed by further hikes into Q2. Despite the rise in interest rates, we've seen over the past few months, the US economy has held up reasonably well, with strong growth in Q3 as well as Q4, after a weak H1. US markets finished the day lower albeit off the lows of the day with the S&P500 posting its 4th successive day of losses, although the Nasdaq managed to close higher. This divergence looks set to help markets in Europe open marginally higher, although the FTSE100 looks set to underperform due to a host of big companies going ex-div, including GSK, AstraZeneca, Unilever and Barclays. Today's weekly jobless claims are likely to reinforce the tightness of the US labour market and are expected to rise to 200k from 194k. Despite the rise in interest rates, we've seen over the past few months, the US economy has held up reasonably well, with strong growth in Q3 as well as Q4, after a weak H1. The first iteration of US Q4 GDP saw the economy expand by 2.9%, which was above expectations of 2.5%. Read next: The Real Estate Market In China Has A Chance To Revive, Indonesia Economy Is More Resilient| FXMAG.COM Personal consumption was a little disappointing, slipping back to 2.1%, which wasn't that surprising given that November and December retail sales contracted. This trend will probably rebound in the January personal spending and income numbers which are due tomorrow. Before this afternoon's claims data and US Q4 GDP we get the final iteration of EU CPI for January which is expected to be confirmed at a slightly higher 8.6%, due to hotter than expected Germany CPI numbers, while core prices are expected to remain steady at a record high of 5.2%. This guarantees another 50bps rate hike from the ECB when it meets next in March, a move which was reiterated earlier this week by ECB President Christine Lagarde..  EUR/USD - slipped below the 1.0610 level keeping the prospect of a move towards the 1.0480 level.  We have resistance at the 50-day SMA currently at 1.0730. GBP/USD – still ranging between support at the 200-day SMA at 1.1935, and resistance at the 50-day SMA at 1.2180. We need to see a move through 1.2200 to target a move back towards 1.2300. EUR/GBP – rallied from the 0.8780 area and currently finding resistance at the 50-day SMA at 0.8820 area. Further resistance comes in at the 0.8870 area. USD/JPY – slipped back from 2-month highs at 135.25 area, as it looks to edge towards the 200-day SMA at 136.70. Interim support at 133.60, and below that at 132.60, and 50-day SMA.   FTSE100 is expected to open 10 points lower at 7,920 DAX is expected to open 60 points higher at 15,460 CAC40 is expected to open 21 points higher at 7,320

EUR/GBP is still evolving within a major sideways range since August 2017 with its key resistance and support at 0.9300 and 0.8300. A minor downtrend phase has started to develop from its 3 February 2023 high of 0.8979. Short-term downside momentum remains intact below 0.8750 key short-term resistance. Since the start of this week, the EUR/GBP cross pair has continued its drop by 0.9% to print its current intraweek low of 0.8671 where market participants anticipant that the Bank of England (BoE) is likely to maintain its hawkish monetary policy stance throughout 2023 after its monetary policy decision due later today. It is widely expected that BoE will hike its policy interest rate by another 25 basis points to 4.5%, its 12th consecutive rise and it is still way behind a red-hot March CPI print of 10.1% year-on-year inflationary growth for the UK. Let’s now take a look at the recent EUR/GBP movements from a technical analysis perspective. Fig 1:  EUR/GBP trend as of 11 May 2023 (Source: TradingView, click to enlarge chart) Since its 3 February 2023 high of 0.8979, the EUR/GBP cross rate has started to evolve into a minor downtrend phase with the upper and lower limits of its short-term descending channel at 0.8865 and 0.8630 respectively. In the longer-term (monthly chart), it is still trapped inside a major sideways range configuration since August 2017. Since last Friday, 5 May, its price actions have broken and traded below the key 200-day moving average now acting as a resistance at around 0.8730. In addition, the 4-hour RSI oscillator has rebounded from its recently reached oversold region (below 30%) but has not formed any bullish divergence signal yet. In addition, the 4-hour RSI is still capped below by a corresponding descending resistance at the 50% level. These observations suggest that short-term downside momentum remains intact. The next intermediate support to watch will be at 0.8630 and a break below it exposes the next support at 0.8570. However, a clearance above 0.8750 short-term pivotal resistance negates the bearish tone to see the descending channel resistance coming in at around 0.8865 which also confluences with the minor swing high areas of 23 March/27 April 2023. Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc. EUR/GBP Technical: Minor downtrend intact - MarketPulseMarketPulse

GBP: Hard to fight the aggressive BoE pricing   Money markets now price 100bp of Bank of England tightening by November.   This would put the Bank Rate at 5.50%. Our team's view is that such an amount of tightening is highly unlikely and that the usually reticent Bank of England may try and verbally push back against it.   However, UK data is doing the most of the talking and it will probably be the jobs/wages data (13 June) or the May CPI data (21 June) which will be the key determinant on whether the market reins in aggressive tightening expectations.   Until then, EUR/GBP can probably press support at 0.8650, below which 0.8600/8610 is the next target. GBP/USD can better resist the stronger dollar. Support around the 1.2275/2300 area may hold temporarily.

Europe set for a mixed open, as debt ceiling deal heads towards a vote. By Michael Hewson (Chief Market Analyst at CMC Markets UK) With both the US and UK markets closed yesterday, there was a rather tepid response to the weekend news that the White House and Republican leaders had agreed a deal to raise the debt ceiling, as European markets finished a quiet session slightly lower. The deal, which lays out a plan to suspend the debt ceiling beyond the date of the next US election until January 1st 2025, will now need to get agreement from lawmakers on both sides of the political divide to pass into law. That could well be the hardest part given that on the margins every vote is needed which means partisan interests on either side could well derail or delay a positive outcome. A vote on the deal could come as soon as tomorrow with a new deadline of 5th June cited by US Treasury Secretary Janet Yellen. US markets, which had been rising into the weekend on the premise that a deal was in the making look set to open higher when they open later today, however markets in Europe appear to be less than enthused. That's probably due to concerns over how the economic recovery in China is doing, with recent economic data suggesting that confidence there is slowing, and economic activity is declining. Nonetheless while European stocks have struggled in recent weeks, they are still within touching distance of their recent record highs, although recent increases in yields and persistent inflation are starting to act as a drag. This is likely to be the next major concern for investors in the event we get a speedy resolution to the US debt ceiling headwind. We've already seen the US dollar gain ground over the last 3 weeks as markets start to price in another rate hike by the Federal Reserve next month, and more importantly start to price out the prospect of rate cuts this year. Last week's US and UK economic data both pointed to an inflationary outlook that is much stickier than was being priced a few weeks ago, with core prices showing little sign of slowing. In the UK core prices surged to a 33 year high of 6.8% while US core PCE edged up to 4.7% in April, meaning pushing back any possible thoughts that we might see rate cuts as soon as Q3. At this rate we'll be lucky to see rate cuts much before the middle of 2024, with the focus now set to shift to this week's US May jobs report on Friday, although we also have a host of other labour market and services data between now and then to chew over. The last few weeks have seen quite a shift, from the certainty that the Federal Reserve was almost done when it comes to rate hikes to the prospect that we may well see a few more unless inflation starts to exhibit signs of slowing markedly in the coming months. In the EU we are also seeing similar trends when it comes to sticky inflation with tomorrow's flash CPI numbers for May expected to show some signs of slowing on the headline number, but not so much on the core measure. On the data front today we have the latest US consumer confidence numbers for May which are expected to see a modest slowdown from 101.30 in April to 99, and the lowest levels since July last year. EUR/USD – has so far managed to hold above the 1.0700 level, with a break below arguing to a move back towards 1.0610. We need to see a rebound above 1.0820 to stabilise. GBP/USD – holding above the 1.2300 area for now with further support at the April lows at 1.2270. We need to recover back above 1.2380 to stabilise. EUR/GBP – currently struggling to move above the 0.8720 area, with main resistance at the 0.870 area. A move below current support at 0.8650 could see a move towards 0.8620. USD/JPY – having broken above the 139.60 area this now becomes support for a move towards 142.50 which is the 61.8% retracement of the down move from the recent highs at 151.95 and lows at 127.20. Further support remains back at the 137.00 area and 200-day SMA. FTSE100 is expected to open unchanged at 7,627 DAX is expected to open 17 points higher at 15,967 CAC40 is expected to open 30 points lower at 7,273

With the White House and Republican leaders agreeing a deal on the debt ceiling at the weekend markets are now obsessing about whether the deal will get the necessary votes to pass into law, as partisan interests line up to criticise the deal.   With the deadline for a deal now said to be next Monday, 5th June a vote will need to go forward by the end of the week, with ratings agencies already sharpening their pencils on downgrades for the US credit rating. European markets sank sharply yesterday along with bond yields, as markets started to fret about a recession, while oil prices sank 4% over demand concerns. US markets also struggled for gains although the Nasdaq 100 has continued to outperform as a small cohort of tech stocks contrive to keep US markets afloat. As we look towards today's European open and the end of the month, we look set for further declines after Asia markets slid on the back of another set of weak China PMIs for May. We'll also be getting another look at how things are looking with respect to economic conditions in Europe, as well as an insight into some key inflation numbers, although core prices will be missing from this snapshot. French Q1 GDP is expected to be confirmed at 0.2% while headline CPI inflation for May is expected to slow from 6.9% to 6.4%. Italian Q1 GDP is also expected to be confirmed at 0.5, and headline CPI for May is expected to slow from 8.7% to 7.5%. We finish up with the flash CPI inflation numbers from Germany, which is also expected to see a slowdown in headline from 7.6% to 6.7% in May. While this is expected to offer further encouragement that headline inflation in Europe is slowing, that isn't the problem that is causing investors sleepless nights. It's the level of core inflation and for that we'll have to wait until tomorrow and EU core CPI numbers for May, which aren't expected to show much sign of slowing.   We'll also get another insight into the US jobs markets and the number of vacancies in April, which is expected to fall from 9.59m in March to 9.4m. While a sizeable drop from the levels we were seeing at the end of last year of 11m, the number of vacancies is still over 2m above the levels 2 years ago, and over 3m above the levels they were pre-pandemic. The size of this number suggests that the labour market still has some way to go before we can expect to see a meaningful rise in the unemployment rate off its current low levels of 3.4%. EUR/USD – slipped to the 1.0673 area before rebounding with the 1.0610 area the next key support. We need to see a rebound above 1.0820 to stabilise.   GBP/USD – rebounded from the 1.2300 area with further support at the April lows at 1.2270. Pushed back to the 1.2450 area and the 50-day SMA, before slipping back. A move through 1.2460 is needed to open up the 1.2520 area.   EUR/GBP – slid to a 5-month low yesterday at 0.8628 just above the next support at 0.8620. A move below 0.8620 opens up the December 2022 lows at 0.8558. Main resistance remains at the 0.8720 area.   USD/JPY – ran into some selling pressure at 140.90 yesterday, slipping back to the 139.60 area which is a key support area. A break below 139.50 could see a return to the 137.00 area, thus delaying a potential move towards 142.50 which is the 61.8% retracement of the down move from the recent highs at 151.95 and lows at 127.20.   FTSE100 is expected to open 22 points lower at 7,500   DAX is expected to open 64 points lower at 15,845   CAC40 is expected to open 34 points lower at 7,175

GBP: Sterling steady into jobs data next Tuesday EUR/GBP volatility remains near recent lows and spot trades well within a tight 0.8570-0.8640 range. Second or third-tier UK data has been quite mixed recently, but the main event on the data front will be next Tuesday's release of jobs and wages data. We see that as a negative event risk for sterling, where wage growth could continue to slow and take some of the steam out of the 100bp+ Bank of England tightening expectations still priced in by money markets. GBP/USD to trade well within a 1.2400-1.2500 range.  

EUR: Shrugging off the recession EUR/USD is back around the 1.0800 handle, with the moves once again coming entirely from the USD leg. Domestically, the news of the eurozone entering a technical recession after the 1Q GDP revision was understandably overlooked by the market, and may well be overlooked too by an inflation-focused ECB next week (here is our economist’s meeting preview).   There are no domestic drivers for the euro today, and in line with what we highlighted in the USD section above, we expect some consolidation around current levels in core dollar pairs. EUR/USD could stabilise marginally below 1.0800.   Elsewhere in Europe, we saw EUR/CHF come under pressure yesterday following hawkish comments from the Swiss National Bank Governor Thomas Jordan, where he highlighted how current rates are low and “it’s not really a good idea to wait then have higher inflation later”. The SNB will announce policy on 22 June, and we expect a 25bp hike following a similar move by the ECB. It appears however, that the market is pricing in more beyond that hike, which is not part of our baseline scenario at the moment.   GBP: EUR/GBP is undervalued EUR/GBP has moved back below 0.8600 after a very small rebound and we estimate the pair to be trading at around a 2.0% short-term undervaluation at the current levels, which falls beyond the 1.4% 1.5 standard-deviation lower-bound.   We remain of the view that EUR/GBP will increasingly struggle to find more bearish momentum now that markets are already pricing in 100bp of Bank of England tightening and the pair is already in undervaluation territory. On the cable side, we expect some stabilisation around 1.2550-1.2600. The UK calendar is empty today.

Fed set for a rate pause; UK GDP set to rebound in April    European markets closed higher for the second day in a row, after the latest US inflation numbers for May came in at a 2-year low, and speculation about further Chinese stimulus measures boosted sentiment.   US markets followed suit although the enthusiasm and gains were tempered ahead of today's Fed meeting as caution set in ahead of the rate announcement.   Having seen US CPI for May come in at a two year low of 4%, in numbers released yesterday, market expectations are for the US central bank to take a pause today with a view to looking at a hike in July. Of course, this will be predicated on how the economic data plays out over the next 6-7 weeks but nonetheless the idea that you would commit to a hike in July begs the question why not hike now and keep your options open regarding July, ensuring that financial conditions don't loosen too much.   Today's May PPI numbers are only likely to reinforce this more dovish tilt, if as expected we see further evidence of slowing prices, with core prices set to fall below 3% for the first time in over 3 years. Headline PPI is expected to slow to 1.5%, down from 2.3%.       When Fed officials set out the "skip" mindset in their numerous briefings since the May decision when the decision was taken to remove the line that signalled more rate hikes were coming, there was always a risk that this sort of pre-commitment might turn out to be problematic.   So, while markets are fully expecting the Fed to announce no change today, Powell's biggest challenge will be in keeping the prospect of a July rate hike a credible outcome, while at the same time as outlining the Fed's economic projections for the rest of the year, as well as for 2024.   In their previous projections they expect unemployment to rise to a median target of 4.5% by the end of this year. Is that even remotely credible now given we are currently at 3.7%, while its core PCE inflation target is 3.6%, and median GDP is at 0.4%.     Before we get to the Fed meeting the focus shifts back to the UK economy after yesterday's unexpectedly solid April jobs data, as well as the sharp surge in wages growth, which prompted UK 2-year gilt yields to surge to their highest levels since 2008, up almost 25bps on the day.   While unemployment slipped back to 3.8% as more people returned to the work force, wage growth also rose sharply to 7.2%, showing once again the resilience of the UK labour market, and once again underlining the policy failures of the Bank of England in looking to contain an inflation genie that has got away from them.   This failure now has markets pricing in the prospect that we could see bank rate as high as 6% in the coming months, from its current 4.5%. The risk is now the Bank of England, stung by the fierce and deserved criticism coming its way, will now overreact at a time when inflation could well start to come down sharply in the second half of this year.   So far this year the UK economy has held up reasonably well, defying the doomsters that were predicting a 2-year recession at the end of last year. As things stand, we aren't there yet, unlike Germany and the EU who are both in technical recessions.   Sharp falls in energy prices have helped in this regard, and economic activity has held up well, with PMI activity showing a lot of resilience, however the biggest test is set to come given that most mortgage holders have been on fixed rates these past two years which are about to roll off.     As we look to today's UK April GDP numbers, we've just come off a March contraction of -0.3% which acted as a drag on Q1's 0.1% expansion. The reason for the poor performance in March was due to various public sector strike action from healthcare and transport, which weighed heavily on the services sector which saw a contraction of -0.5%.     The performance would have been worse but for a significant rebound in construction and manufacturing activity which saw strong rebounds of 0.7%.     This isn't expected to be repeated in today's April numbers, however there was still widespread strike action which is likely to have impacted on public services output.   The strong performance from manufacturing is also unlikely to be repeated with some modest declines, however services should rebound to the tune of 0.3%, although the poor March number is likely to drag the rolling 3M/3M reading down from 0.1% to -0.1%.       EUR/USD – failed at the main resistance at the 1.0820/30 area, which needs to break to kick on higher towards 1.0920. We still have support back at the recent lows at 1.0635.     GBP/USD – finding resistance at trend line resistance from the 2021 highs currently at 1.2630. This, along with the May highs at 1.2680 is a key barrier for a move towards the 1.3000 area. We have support at 1.2450.      EUR/GBP – has slipped back from the 0.8615 area yesterday, however while above the 0.8540 10-month lows, the key day reversal scenario just about remains intact. A break below 0.8530 targets a move towards 0. 8350.     USD/JPY – looks set to retest the recent highs at 140.95, with the potential to move up towards 142.50.  Upside remains intact while above 138.30.      FTSE100 is expected to open 10 points lower at 7,585     DAX is expected to open 15 points lower at 16,215     CAC40 is expected to open 3 points lower at 7,288

GBP: Hard to buck the sterling bullish trend EUR/GBP pressing lower again this morning: a move below the 0.8540 support would set the pair back to pre-Mini-Budget crisis levels (August 2022). UK GDP figures for April matched expectations, showing 0.2% MoM growth, while industrial production declined by more than expected (1.9% YoY).   Still, the latest evidence from employment and wage growth has prompted yet another repricing higher in BoE rate expectations, with 132bp of tightening priced in by year-end. With short-dated gilts reaching their highest levels since 2008 yesterday, it remains hard to buck the EUR/GBP bearish trend, especially ahead of the ECB risk event, but our medium-term view remains bullish on the pair.

GBP: Staying supported into the BoE meeting We are entering a few days of calm in the UK calendar after a slew of key data releases. Yesterday’s GDP data endorsed the recent re-rating of the UK’s growth outlook but hardly mattered for the Bank of England as much as the inflationary signals sent from the jobs and wage growth figures earlier this week.   Bank of England rate expectations were marginally scaled back after the Fed meeting, but still imply five 25bp rate increases from current levels before the end of the year. It’s important to note how the higher gilt rates are by themselves starting to have their tightening effect on the economy. Mortgage market distress is the most direct example, with major lenders hiking rates and some pulling mortgage offers following the recent repricing of tightening expectations.   It is, still, too early to factor that – or any implications for the housing market – into sterling, which will probably continue to find support into next week’s CPI and Bank of England meeting. EUR/GBP could move closer to the 0.8500 key support after today’s ECB decision.

While the Fed and ECB sound hawkish, the BoJ continues to remain dovish    While European markets underwent a rather subdued and negative finish yesterday, US markets continued their recent exuberant run, with the S&P500 and Nasdaq 100 both closing higher for the 6th day in a row. This was a little surprising given that the Federal Reserve and the European Central Bank both delivered very hawkish outcomes in the space of 24 hours of each other, as well as painting very cautious outlooks for growth and inflation over the course of the next 12 months. While the Federal Reserve kept rates unchanged, they upgraded their terminal rate forecast for this year by indicating that they expected to deliver another 2 rate hikes by the end of this year. This was a little surprising even with the fact that the labour market continues to exhibit significant tightness.     This is because a lot of the main inflation indicators, particularly the forward-looking ones, are showing increasing evidence of disinflation. If they are showing these signs now then the signs will be much more evident in the next few weeks, which means that for all the Fed's jawboning today its highly unlikely they will be able to follow through on it.     Quite simply markets aren't buying it with US 2-year yields below the levels they were prior to Wednesday's Fed meeting. In essence the market thinks the Fed is done as far as rate hikes are concerned.     Yesterday's economic data also cast doubt on the Fed's forward guidance for rates this year with US import prices for May plunging by -5.9% year on year, close to levels last seen in April 2020. Export prices on the other hand fell even more sharply, falling to a record low of -10.1%   While the ECB did deliver a rate hike, they also revised upwards their core inflation forecasts for this year from 4.6% to 5.1%, which was quite punchy given that core inflation has already fallen back to 5.3% in this month's flash numbers, down from 5.6% in April, and just below the record high of 5.7% set in March. This core number is expected to be confirmed in data scheduled to be released later this morning.   ECB President Christine Lagarde even went as far as more or less pre-committing to another 25bps rate hike in July, which in turn helped to push European yields sharply higher. They may well be able to deliver on this, however there is room for scepticism when it comes to any rate moves beyond that.   This is because their core inflation expectations for the end of this year come across as way too high. Does anyone at the ECB seriously believe that core prices won't have fallen below 5% from where they are now by the end of this year, when producer price inflation is already slowing sharply. If they do, they need to have another look at their economic models.   This morning the Bank of Japan delivered their own assessment of the outlook for the Japanese economy, with traders and investors increasingly scratching their heads as to why new Bank of Japan governor Kazuo Ueda seems so reluctant to even consider starting to look at paring back their own easy monetary policy, when core CPI is at 4.1% and the highest level since the 1980's. The BoJ seems to be of the opinion that current levels of core inflation aren't sustainable and that prices will fall back towards 3.5%, before accelerating modestly again.      The central bank is due to update its economic forecasts in July, while Governor Ueda is due to speak in a couple of hours' time when he might offer further insights as to why the Bank of Japan is reluctant to alter its policy settings quite yet.   EUR/USD – pushed above the 50-day SMA at 1.0880, as well as pushing through 1.0920/30 opening the prospect for a return to the April highs at 1.1095. We now have support back at the 1.0820/30 break out level.     GBP/USD – broken above previous highs this year at 1.2680 and kicked on above the 1.2760 area which is 61.8% retracement of the 1.4250/1.0344 down move. This puts us on course for a move towards the 1.3000 area. We now have support at 1.2630.      EUR/GBP – continues to hold above the 0.8530/40 area rallying back to the 0.8600 area before slipping back. The key day reversal from earlier this week is just about still valid, however the lack of a rebound is a concern. A break below 0.8530 targets a move towards 0.8350. Resistance at 0.8620.     USD/JPY – pushed up to 141.50 yesterday, before slipping back, with the next resistance at 142.50 which is 61.8% retracement of the 151.95/127.20 down move. Support now comes in at 140.20/30      FTSE100 is expected to open 7 points higher at 7,635     DAX is expected to open 15 points higher at 16,305     CAC40 is expected to open unchanged at 7,290     By Michael Hewson (Chief Market Analyst at CMC Markets UK)  

GBP: Sterling to hold gains into next week's CPI data Sterling continues to hold gains as the market rigidly holds onto aggressive Bank of England tightening expectations. This year sterling's correlation with risk assets had fallen, suggesting perhaps that it should not be at the forefront of a risk rally. However, as above, we think the dollar environment is softening and we do not want to stand in the way of a GBP/USD rally.  Looking at the charts it seems there is 'fresh air' between current levels (1.2750/1.2800) and 1.3000 – suggesting the latter beckons. For EUR/GBP, the hawkish ECB helps strengthen the support at 0.8550, although next week's release of the UK June CPI will probably be the next big driver here, ahead of an expected 25bp BoE rate hike next Thursday.

The inflation story should start to turn over the summer Then there’s the inflation data itself. The dividing line on the committee right now seems between those hawks that are seeing persistent ‘second-round effects’ of higher energy/food prices, and the doves that think headline/core CPI is simply just lagging behind the wider fall in input and product price inflation over recent months (see a speech by BoE’s Dhingra). Elements of both are true. April’s CPI figures were undeniably ugly, though some of the drivers – higher vehicle and alcohol prices, for example – are unlikely to form long-lasting trends. We agree with the doves that food inflation should begin to ease back in line with producer prices, while services inflation (particularly hospitality) should come under less pressure now gas prices are so much lower. The BoE’s own Decision Maker Panel survey of chief financial officers suggests pay and price expectations have also eased noticeably over recent months. If nothing else, hefty base effects should ensure that the headline inflation rate comes down over the summer months and fluctuates around 6%, and to a lesser extent the same is true of the core rate. Barring some further unpleasant and consistent surprises in the services inflation figures over the coming months, we think a 5% peak for Bank Rate seems reasonable. That implies rate hikes on Thursday and again in August.  However, as we discussed in more detail in a separate piece, we think the downtrend in wage growth is going to be slow – even if it has probably peaked. Labour market shortages look at least partly structural, and we suspect wage growth could end the year above 5% (7% currently). While that doesn't necessarily require the Bank to take rates much higher, it does suggest rate cuts are unlikely for at least a year, not least given the mortgage market structure discussed earlier.   Sterling trade-weighted index pushes back to early 2022 highs   Sterling can hold onto gains in the near term Sterling continues to ride high. On a trade-weighted basis, it is returning to levels last seen in early 2022 before Russia's invasion of Ukraine. Barring a surprisingly soft May UK CPI on Wednesday, 21 June, it looks like sterling can largely hang onto those gains if the Bank of England does not push back against very aggressive tightening expectations. Our strong preference has been that sterling will enjoy more upside against the dollar than the euro. Currently, we have a 1.33 end-year forecast for GBP/USD and the near-term bias is for 1.30 given what seems to be bearish momentum building against the dollar. EUR/GBP has been weaker than we had expected. And next week's BoE meeting may be too soon to expect a bullish reversal here. Yet, consistent with our house view that the Bank Rate will not be taken as high as the 5.65% level currently priced by investors for the end of this year, we suspect that EUR/GBP ends the year closer to the 0.88 area, meaning that current EUR/GBP levels should make a good opportunity to hedge sterling receivables for euro-based accounts. 

Rising rates and rising stock markets aren't usually a combination that sits comfortably with a lot of investors but that's exactly what we saw last week, with European markets enjoying their best week in over 2 months, while US markets and the S&P500 enjoying its best week since March.     One of the reasons behind this rebound is a belief that Chinese demand may well pick up as the authorities there implement stimulus measures to support their struggling economy.   There is also a belief that despite seeing the Federal Reserve deliver a hawkish pause to its rate hiking cycle and the ECB deliver another 25bps rate hike last week, that we are close to the peak when it comes to rate rises, even though there is a growing acceptance that interest rates aren't coming down any time soon.     We did have one notable outlier from last week and that was the Bank of Japan who left their current policy settings unchanged in the monetary policy equivalent of what could be described as sticking one's fingers in one's ears and shouting loudly, and pretending core inflation isn't already at 40-year highs.   This week, attention turns to the Swiss National Bank, as well as the Bank of England, who are both expected to follow in the ECB's footsteps and hike rates by 25bps.   The UK especially has a big inflation problem, with average wages up by 7.2% for the 3-months to April, the Bank of England, not for the first time, has allowed inflation expectations to get out of control. This was despite many warnings over the last 18-months that they were acting too slowly, even though they were the first central bank to start hiking rates.     We heard over the weekend from former Bank of England governor Mark Carney that this state of affairs wasn't surprising to him, and that Brexit was partly to blame for the UK's high inflation rate and that he was proved correct when he warned of the long-term effects back in 2016.   Aside from the fact that UK inflation is not that much higher than its European peers, Carney's intervention is a helpful reminder of what a poor job he did as Bank of England governor. At the time he warned of an economic apocalypse warning that growth would collapse and unemployment would soar, and yet here we are with a participation rate at near record levels, and an economy that isn't in recession, unlike Germany and the EU, which are.     The reality is that two huge supply shocks have hit the global economy, firstly Covid and then the Russian invasion of Ukraine, and that the UK's reliance on imported energy and lack of gas storage which has served to magnify the shock on the UK economy.   That would have happened with or without Brexit and to pretend otherwise is nonsense on stilts. If anything is to blame it is decades of poor energy policy and economic planning by successive and existing UK governments. UK inflation is also taking longer to come down due to the residual effects of the energy price cap, another misguided, and ultimately costly government policy.   Carney is probably correct about one thing, and that is interest rates are unlikely to come down any time soon, and could stay at current levels for years.   This week is likely to be a big week for the pound, currently at 14-month highs against the US dollar, with markets pricing in the prospect of another 100bps of rate hikes. UK 2-year gilt yields are already above their October peaks and at 15-year highs, although 5- and 10-year yields aren't.     This feels like an overreaction and while many UK mortgage holders are looking at UK rates with trepidation, this comes across as overpriced. It seems highly likely we will get one rate rise this week and perhaps another in August, but beyond another 50bps seems a stretch and would be a surprise.        With some US markets closed for the Juneteenth public holiday, today's European session is likely to be a quiet one, with a modestly negative open after US markets finished the end of a positive week, with their first daily decline in six days.       EUR/USD – pushed up to the 1.0970 area last week having broken above the 50-day SMA at 1.0880. We now look set for a move towards the April highs at the 1.1095 area. Support comes in at the 50-day SMA between the 1.0870/80 area.     GBP/USD – broken above previous highs this year at 1.2680 last week as well as moving above the 1.2760a area which is 61.8% retracement of the 1.4250/1.0344 down move. This puts us on course for a move towards the 1.3000 area. We now have support at 1.2630.      EUR/GBP – broken below the 0.8530/40 area negating the key reversal day last week and opening up the risk of further losses towards the 0.8350 area. Initial support at the 0.8470/80 area. Resistance at 0.8620.     USD/JPY – continues to push higher and on towards the next resistance at 142.50 which is 61.8% retracement of the 151.95/127.20 down move. Support now comes in at 140.20/30      FTSE100 is expected to open 35 points lower at 7,608     DAX is expected to open 92 points lower at 16,265     CAC40 is expected to open 34 points lower at 7,354   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  

Rising rates and rising stock markets aren't usually a combination that sits comfortably with a lot of investors but that's exactly what we saw last week, with European markets enjoying their best week in over 2 months, while US markets and the S&P500 enjoying its best week since March.     One of the reasons behind this rebound is a belief that Chinese demand may well pick up as the authorities there implement stimulus measures to support their struggling economy.   There is also a belief that despite seeing the Federal Reserve deliver a hawkish pause to its rate hiking cycle and the ECB deliver another 25bps rate hike last week, that we are close to the peak when it comes to rate rises, even though there is a growing acceptance that interest rates aren't coming down any time soon.     We did have one notable outlier from last week and that was the Bank of Japan who left their current policy settings unchanged in the monetary policy equivalent of what could be described as sticking one's fingers in one's ears and shouting loudly, and pretending core inflation isn't already at 40-year highs.   This week, attention turns to the Swiss National Bank, as well as the Bank of England, who are both expected to follow in the ECB's footsteps and hike rates by 25bps.   The UK especially has a big inflation problem, with average wages up by 7.2% for the 3-months to April, the Bank of England, not for the first time, has allowed inflation expectations to get out of control. This was despite many warnings over the last 18-months that they were acting too slowly, even though they were the first central bank to start hiking rates.     We heard over the weekend from former Bank of England governor Mark Carney that this state of affairs wasn't surprising to him, and that Brexit was partly to blame for the UK's high inflation rate and that he was proved correct when he warned of the long-term effects back in 2016.   Aside from the fact that UK inflation is not that much higher than its European peers, Carney's intervention is a helpful reminder of what a poor job he did as Bank of England governor. At the time he warned of an economic apocalypse warning that growth would collapse and unemployment would soar, and yet here we are with a participation rate at near record levels, and an economy that isn't in recession, unlike Germany and the EU, which are.     The reality is that two huge supply shocks have hit the global economy, firstly Covid and then the Russian invasion of Ukraine, and that the UK's reliance on imported energy and lack of gas storage which has served to magnify the shock on the UK economy.   That would have happened with or without Brexit and to pretend otherwise is nonsense on stilts. If anything is to blame it is decades of poor energy policy and economic planning by successive and existing UK governments. UK inflation is also taking longer to come down due to the residual effects of the energy price cap, another misguided, and ultimately costly government policy.   Carney is probably correct about one thing, and that is interest rates are unlikely to come down any time soon, and could stay at current levels for years.   This week is likely to be a big week for the pound, currently at 14-month highs against the US dollar, with markets pricing in the prospect of another 100bps of rate hikes. UK 2-year gilt yields are already above their October peaks and at 15-year highs, although 5- and 10-year yields aren't.     This feels like an overreaction and while many UK mortgage holders are looking at UK rates with trepidation, this comes across as overpriced. It seems highly likely we will get one rate rise this week and perhaps another in August, but beyond another 50bps seems a stretch and would be a surprise.        With some US markets closed for the Juneteenth public holiday, today's European session is likely to be a quiet one, with a modestly negative open after US markets finished the end of a positive week, with their first daily decline in six days.       EUR/USD – pushed up to the 1.0970 area last week having broken above the 50-day SMA at 1.0880. We now look set for a move towards the April highs at the 1.1095 area. Support comes in at the 50-day SMA between the 1.0870/80 area.     GBP/USD – broken above previous highs this year at 1.2680 last week as well as moving above the 1.2760a area which is 61.8% retracement of the 1.4250/1.0344 down move. This puts us on course for a move towards the 1.3000 area. We now have support at 1.2630.      EUR/GBP – broken below the 0.8530/40 area negating the key reversal day last week and opening up the risk of further losses towards the 0.8350 area. Initial support at the 0.8470/80 area. Resistance at 0.8620.     USD/JPY – continues to push higher and on towards the next resistance at 142.50 which is 61.8% retracement of the 151.95/127.20 down move. Support now comes in at 140.20/30      FTSE100 is expected to open 35 points lower at 7,608     DAX is expected to open 92 points lower at 16,265     CAC40 is expected to open 34 points lower at 7,354   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  

GBP: Steady into Wednesday's May CPI release Sterling is holding onto recent gains and as our UK economist James Smith outlines in our Bank of England preview, we doubt the BoE has sufficient ammunition (yet) to push back against the nearly five 25bp hikes expected before year-end. That suggests sterling can stay supported for the time being.   Technically, GBP/USD does look as though it can advance to the 1.30 area - though the macro catalyst for further gains appears unclear. Indeed, the UK press is really pushing the 'mortgage timebomb' story at present, but sterling probably does not correct lower until we see some softer price data - which may take a few months to come through.   EUR/GBP continues to trade offered. At least a hawkish ECB provides some pushback to the BoE pricing and we continue to forecast a higher EUR/GBP later this year - once the hot UK inflation story cools. EUR/GBP may find support here at 0.8500/8550.

With US markets closed, markets in Europe underwent a weak and subdued session at the start of the new week with yesterday's declines predominantly on the back of the late Friday sell-off in the US, which saw markets there close off their highs of the week. The lack of any further details on a China stimulus plan, along with additional upward pressure on interest rates over uncertainty about further rate rises, and a slowing global economy, saw European investors engage with some modest profit taking.     Asia markets were mixed this morning, even as the People's Bank of China cut its 1 and 5 year lending rates by a modest 10 bps.     The UK gilt market was the main source of movement in the bond market, with 2-year yields pushing up to their highest level in 15 years, while 5- and 10-year yields came close to the highs we saw at the end of September last year, after the Kwarteng budget.       There is growing anxiety about the effect the recent rise in UK gilt yields is already having on the mortgage market, a concern that was played out in the form of weakness in house building and real estate shares yesterday, as 2-year mortgage deals pushed above 6%.     It is also feeding into a wider concern that economic activity in the second half of the year will be constrained by increased mortgage costs, which in turn will push up rents as well as shrinking disposable income.     All eyes will be on tomorrow's inflation numbers with Bank of England policymakers praying that we start to see rapid slowdowns in how fast prices are rising before the end of the summer.     While prices have been slowing here in the UK they have been slowing more rapidly in the US as well as in Europe, although in Europe they also fell from much higher levels.     Today we get the latest Germany PPI numbers for May which have been slowing sharply from peaks of 45.8% back in August, and had come down to 17.6% by January this year. In today's numbers for May it is expected to see annualised price growth slow further to 1.7%, while seeing a -0.7% decline month on month.     Another monthly decline in today's numbers would be the 7th monthly decline in the last 8 months, in a sign that disinflation is working its way through the system, and could also manifest itself in this week's UK PPI numbers as well.     The puzzle is why it is taking so long to bleed into the headline CPI and core CPI numbers, though it could start to by the beginning of Q3. The Bank of England will certainly be praying it does. As we look towards today's European open its likely to be a modestly higher one.          EUR/USD – have slipped back from the 1.0970 area having broken above the 50-day SMA at 1.0880 which now acts as support. We still remain on course for a move towards the April highs at the 1.1095 area.     GBP/USD – slipped back from 1.2845/50 area with support now at 1.2750 which was the 61.8% retracement of the 1.4250/1.0344 down move. If we slip below 1.2750, we could see further weakness towards 1.2680. Still on course for a move towards the 1.3000 area.      EUR/GBP – remains under pressure and on course for further losses toward the 0.8470/80 area. Currently have resistance at 0.8580 area and behind that at 0.8620.     USD/JPY – still on course for a move towards the next resistance at 142.50 which is 61.8% retracement of the 151.95/127.20 down move. Above 142.50 targets the 145.00 area. Support now comes in at 140.20/30      FTSE100 is expected to open unchanged at 7,588     DAX is expected to open unchanged at 16,201     CAC40 is expected to open 7 points lower at 7,307

GBP: Cracks starting to show? UK headlines were grabbed yesterday by two-year Gilt yields blasting through 5% and raining more misery on those UK mortgage holders needing to refinance. The UK 2-10 year Gilt curve is now the most inverted since 2000. It's true that a heavily inverted Gilt curve makes it more expensive for foreigners to hedge UK Gilt holdings – i.e. a sterling positive – but this heavily inverted curve will be heaping a lot of pressure on the UK economy. We are probably reading too much into one day's price action, but it could be noticeable that sterling did not follow Gilt yields higher yesterday. Expect EUR/GBP to consolidate into tomorrow's big release of May UK CPI. And again we would see current levels in EUR/GBP as a good area to increase FX hedge ratios on GBP receivables.

UK CPI set to tee up tomorrow's Bank of England rate decision    We've seen a lacklustre start to the week for markets in Europe, as well as the US as disappointment over a weak China stimulus plan, gave investors the excuse to start taking some profits after the gains of recent weeks. Weakness in energy prices also reinforced doubts about the sustainability of the global economy as we head towards the second half of this year.   As we look towards today's European open the main focus is on the latest UK inflation numbers for May ahead of tomorrow's Bank of England rate decision.   Today's UK CPI numbers could make tomorrow's rate decision a much less complicated decision than it might be, especially if the numbers show a clear direction of travel when it comes to a slowing of price pressures. Nonetheless, whatever today's inflation numbers are, we still expect to see a 25bps rate hike tomorrow, however what we won't want to see is another upside surprise given recent volatility in short term gilt yields.   When the April inflation numbers were released, there was a widespread expectation that headline inflation would fall back sharply below 10% and to the lowest levels since March last year. That did indeed happen, although not by as much as markets had expected, falling to 8.7%.       It was also encouraging to see PPI input and output prices slow more than expected in April on an annual basis, to 3.9% and 5.4% respectively.   Unfortunately, this is where the good news ended as while we saw inflation fall back in April it wasn't as deep a fall as expected with many hoping that we'd see headline inflation slow to 8.2%. The month-on-month figure was much hotter than expected at 1.2% and core prices surged from 6.2% to 6.8%, and the highest level since 1990.   The areas where inflation is still looking hot is around grocery prices which saw an annual rise of 19.1%, only modestly lower than the 19.2% in March, while services inflation in hotels and restaurants slowed from 11.3% to 10.2%. Since then, food price inflation has slowed to levels of around 16.5%, still very high, while today's headline number is forecast to slow to 8.5%. More worryingly core prices aren't expected to change at all, remaining at 6.8%, however if we are to look for crumbs of comfort then we should be looking at PPI where in China and Germany we are in deflation.   Given that this tends to be more forward-looking we could find that by Q3 headline CPI could fall quite sharply. Both PPI input and output prices are expected to both decline on a month-on-month basis, while year on year input prices are expected to rise by 1.1%.   In the afternoon, market attention will shift to Washington DC and today's testimony by Fed chair Jerome Powell to US lawmakers in the wake of last week's decision to hold rates at their current levels, while issuing rather hawkish guidance that they expect to hike rates by another 50bps by year end.   This was a little surprising given that inflation appears to be a problem that could be subsiding. Powell is likely to also face further questions from his nemesis Democrat Senator Elizabeth Warren who is likely to further press the Federal Reserve Chairman on the costs that further rate hikes might have in terms of higher unemployment.   Her dislike for Powell is well documented calling him a "dangerous man", however despite these comments her fears of higher unemployment haven't materialised despite 500bps of rate hikes in the past 15 months.   We could also get further insights into last week's discussions with a raft of Fed speakers from the likes of Christopher Waller, Michelle Bowman, James Bullard and Loretta Mester this week.          EUR/USD – currently holding above the 50-day SMA at 1.0870/80 which should act as support. We still remain on course for a move towards the April highs at the 1.1095 area, while above 1.0850.     GBP/USD – slipped back from 1.2845/50 area sliding below 1.2750 with the next support at the 1.2680 area. Still on course for a move towards the 1.3000 area, while above the 50-day SMA currently at 1.2510.      EUR/GBP – found support at the 0.8515/20 area with resistance at the 0.8580 level. While below the 0.8620 area bias remains for a move toward the 0.8470/80 area.     USD/JPY – slipped back from just below the next resistance at 142.50 which is 61.8% retracement of the 151.95/127.20 down move. Above 142.50 targets the 145.00 area. Support now comes in at 140.20/30.      FTSE100 is expected to open 4 points higher at 7,573     DAX is expected to open 42 points higher at 16,153     CAC40 is expected to open 3 points higher at 7,297     By Michael Hewson (Chief Market Analyst at CMC Markets UK)

Bank of England set to raise rates again, but by how much?      European markets fell for the third consecutive day yesterday, after the IFO in Germany warned that a recession would be sharper than expected in the second half of the year, and UK core inflation unexpectedly jumped to a new 32 year high. US markets also fell for the third day in a row after Fed chairman Jay Powell doubled down on his message from last week to US lawmakers yesterday, that US rates would need to rise further to ensure inflation returns to target.   This weakness in US markets looks set to translate into a lower European open, as we look towards another three central bank rate decisions, from the Swiss National Bank, Norges Bank and the Bank of England all of whom are expected to raise rates by 25bps today. Up until yesterday's CPI number markets were predicting with a high degree of certainty that we would see a 25bps rate hike from the Bank of England later today.   That certainty has now shifted to an even split between a 25bps rate hike to a 50bps rate hike after yesterday's sharp jump in core CPI to 7.1% in May.   As inflation readings go it's a very worrying number and suggests that inflation is likely to take longer to come down than anticipated, and even more worrying price pressure appears to be accelerating, in contrast to its peers in the US and Europe where prices now appear to have plateaued.   This has raised the stakes to the point that the Bank of England might feel compelled to hike rates by 50bps later today, and not 25bps as expected. Such an outcome would be a surprise from the central bank given their cautious nature over the years, however such has been the strong nature of recent criticism, there is a risk that they might overreact, in a sign that they want to get out in front of things. Whatever they do today it's not expected to be a unanimous decision, but the surge in core inflation we've seen in recent months, does make you question what it is that Swati Dhingra and Silvana Tenreyro are seeing that makes them think that the last few meetings were worthy of a no change vote.    In the absence of a press conference to explain their actions a 50bps rate move would be a risky strategy, as it could signal they are panicking. A more measured response would be to hike by 25bps with a commitment to go more aggressively at the next meeting if the data warrants it. The big problem the bank has is that they won't get to see the July inflation numbers, when we could see a big fall in headline CPI, until after they have met in August, putting us into the end of Q3 until we know for certain that inflation is coming down. The resilience in UK core inflation has got many people questioning why it is such an outlier, compared to its peers, however if you look closely enough the reason is probably staring us in the face in the form of UK government policy and the energy price cap, which has kept gas and electricity prices artificially high for consumers.   If you look at the price of fuel at the petrol pump it is back at the levels it was prior to the Russian invasion of Ukraine, due to the slide in oil prices from their peaks of $120 a barrel, with consumers already benefitting from this disposable income uplift into their pockets directly in a lower bill when it comes to refilling the family car.    Natural gas prices have gone the same way, yet these haven't fed back into consumers' pockets in the same way as they have in the US and Europe.   This has forced employers here, in the face of significant labour shortages, to increase wages to attract the staff they need, as well as keep existing staff to fulfil their business functions. We already know that average weekly earnings are trending upwards at 7.6% and in some sectors, we've seen wage growth even higher at between 15% and 25%.    These increased costs for businesses inevitably feed through into higher prices in the cost of delivering their services, and voila you have higher service price inflation which in turn feeds into core prices, in essence creating a price/wage spiral.   It is perhaps a supreme irony that an energy price cap that was designed to protect consumers from rising prices is now acting in a fashion that is making UK inflation a lot stickier, and making the UK's inflation problem a lot worse than it should be.   So, while a lot of people are blaming the Bank of England for the mess the UK is in, we should also direct some of the blame at the energy price cap, a Labour Party idea that was hijacked by the Conservatives and is now acting as moron premium in the UK gilt market.   It is these sorts of poorly thought through political interventions that always have a tendency to come back and bite you in ways you don't expect, and the politicians are at it again, with the Lib Dems calling for a £3bn mortgage protection scheme, another crackpot idea that would push back in the opposite direction and simply make the task of getting inflation under control even more difficult.     On the plus side there are reasons to be optimistic, with the energy price cap set due to be reduced in July, while PPI inflation has also been falling sharply, with the monthly numbers in strongly negative territory, meaning it can only be a matter of time before the year-on-year numbers go the same way.     This trend of weaker PPI suggests that market forecasts of a terminal bank rate of 6% might be overly pessimistic, and that subsequent data will pull gilt yields lower, however we may have to wait another 2 to 3 months for this scenario to play out in the data.   This should still feed into headline CPI by the end of the year, though core prices might prove to be slightly more difficult to pull lower.      EUR/USD – remain on course for the April highs at 1.1095 while above the 50-day SMA at 1.0870/80 which should act as support. Below 1.0850 signals a move towards 1.0780.   GBP/USD – fell back to the 1.2680/90 area yesterday before recovering, having found resistance at the 1.2845/50 area at the end of last week. Still on course for a move towards the 1.3000 area, while above the 50-day SMA currently at 1.2510.    EUR/GBP – found support at the 0.8515/20 area and has move up towards the recent highs at 0.8620. A move through 0.8630 could see a move towards 0.8680. While below the 0.8620 area the bias remains for a return to the recent lows.   USD/JPY – currently finding itself rebuffed at the 142.50 area, which is 61.8% retracement of the 151.95/127.20 down move. Above 142.50 targets the 145.00 area. Support now comes in at 140.20/30.    FTSE100 is expected to open 45 points lower at 7,514   DAX is expected to open 82 points lower at 15,941   CAC40 is expected to open 34 points lower at 7,227   By Michael Hewson (Chief Market Analyst at CMC Markets UK)

GBP: Option market prices 70 pip GBP/USD range on BoE day The big day has finally arrived. The market prices 34bp of rate hikes from the Bank of England (BoE) today as the Bank battles second-round inflation in an increasingly febrile political environment. The FX options market prices a 70 pip range for GBP/USD event risk today - which feels a little too narrow. As our UK economist, James Smith, discusses in his BoE preview, it looks too early for the BoE to push back against the very aggressive tightening expectations currently being built into to UK money market curves. These see the Bank Rate nearly 150bp higher at 6.00% early next year. In theory, a 25bp hike (our call) and no BoE pushback can see sterling stay relatively bid. However, it has been noticeable this week that sterling has not followed short-dated UK rates higher  - suggesting investors are looking through the hiking cycle to the pain ahead for the UK economy and asset markets. On balance, we think EUR/GBP has made an important turn higher this week and can easily see it trading back to 0.88 over coming months. The softer dollar environment should keep GBP/USD bid and suggests demand emerges below 1.2700 should the BoE statement or minutes say anything less hawkish than the market expects.

Bank of England set to raise rates again, but by how much?    By Michael Hewson (Chief Market Analyst at CMC Markets UK)     European markets fell for the third consecutive day yesterday, after the IFO in Germany warned that a recession would be sharper than expected in the second half of the year, and UK core inflation unexpectedly jumped to a new 32 year high. US markets also fell for the third day in a row after Fed chairman Jay Powell doubled down on his message from last week to US lawmakers yesterday, that US rates would need to rise further to ensure inflation returns to target.     This weakness in US markets looks set to translate into a lower European open, as we look towards another three central bank rate decisions, from the Swiss National Bank, Norges Bank and the Bank of England all of whom are expected to raise rates by 25bps today. Up until yesterday's CPI number markets were predicting with a high degree of certainty that we would see a 25bps rate hike from the Bank of England later today. That certainty has now shifted to an even split between a 25bps rate hike to a 50bps rate hike after yesterday's sharp jump in core CPI to 7.1% in May.     As inflation readings go it's a very worrying number and suggests that inflation is likely to take longer to come down than anticipated, and even more worrying price pressure appears to be accelerating, in contrast to its peers in the US and Europe where prices now appear to have plateaued. This has raised the stakes to the point that the Bank of England might feel compelled to hike rates by 50bps later today, and not 25bps as expected.     Such an outcome would be a surprise from the central bank given their cautious nature over the years, however such has been the strong nature of recent criticism, there is a risk that they might overreact, in a sign that they want to get out in front of things. Whatever they do today it's not expected to be a unanimous decision, but the surge in core inflation we've seen in recent months, does make you question what it is that Swati Dhingra and Silvana Tenreyro are seeing that makes them think that the last few meetings were worthy of a no change vote.      In the absence of a press conference to explain their actions a 50bps rate move would be a risky strategy, as it could signal they are panicking. A more measured response would be to hike by 25bps with a commitment to go more aggressively at the next meeting if the data warrants it. The big problem the bank has is that they won't get to see the July inflation numbers, when we could see a big fall in headline CPI, until after they have met in August, putting us into the end of Q3 until we know for certain that inflation is coming down.   The resilience in UK core inflation has got many people questioning why it is such an outlier, compared to its peers, however if you look closely enough the reason is probably staring us in the face in the form of UK government policy and the energy price cap, which has kept gas and electricity prices artificially high for consumers. If you look at the price of fuel at the petrol pump it is back at the levels it was prior to the Russian invasion of Ukraine, due to the slide in oil prices from their peaks of $120 a barrel, with consumers already benefitting from this disposable income uplift into their pockets directly in a lower bill when it comes to refilling the family car.  Natural gas prices have gone the same way, yet these haven't fed back into consumers' pockets in the same way as they have in the US and Europe.   This has forced employers here, in the face of significant labour shortages, to increase wages to attract the staff they need, as well as keep existing staff to fulfil their business functions. We already know that average weekly earnings are trending upwards at 7.6% and in some sectors, we've seen wage growth even higher at between 15% and 25%.      These increased costs for businesses inevitably feed through into higher prices in the cost of delivering their services, and voila you have higher service price inflation which in turn feeds into core prices, in essence creating a price/wage spiral. It is perhaps a supreme irony that an energy price cap that was designed to protect consumers from rising prices is now acting in a fashion that is making UK inflation a lot stickier, and making the UK's inflation problem a lot worse than it should be.   So, while a lot of people are blaming the Bank of England for the mess the UK is in, we should also direct some of the blame at the energy price cap, a Labour Party idea that was hijacked by the Conservatives and is now acting as moron premium in the UK gilt market. It is these sorts of poorly thought through political interventions that always have a tendency to come back and bite you in ways you don't expect, and the politicians are at it again, with the Lib Dems calling for a £3bn mortgage protection scheme, another crackpot idea that would push back in the opposite direction and simply make the task of getting inflation under control even more difficult.     On the plus side there are reasons to be optimistic, with the energy price cap set due to be reduced in July, while PPI inflation has also been falling sharply, with the monthly numbers in strongly negative territory, meaning it can only be a matter of time before the year-on-year numbers go the same way.   This trend of weaker PPI suggests that market forecasts of a terminal bank rate of 6% might be overly pessimistic, and that subsequent data will pull gilt yields lower, however we may have to wait another 2 to 3 months for this scenario to play out in the data.     This should still feed into headline CPI by the end of the year, though core prices might prove to be slightly more difficult to pull lower.    EUR/USD – remain on course for the April highs at 1.1095 while above the 50-day SMA at 1.0870/80 which should act as support. Below 1.0850 signals a move towards 1.0780.     GBP/USD – fell back to the 1.2680/90 area yesterday before recovering, having found resistance at the 1.2845/50 area at the end of last week. Still on course for a move towards the 1.3000 area, while above the 50-day SMA currently at 1.2510.      EUR/GBP – found support at the 0.8515/20 area and has move up towards the recent highs at 0.8620. A move through 0.8630 could see a move towards 0.8680. While below the 0.8620 area the bias remains for a return to the recent lows.     USD/JPY – currently finding itself rebuffed at the 142.50 area, which is 61.8% retracement of the 151.95/127.20 down move. Above 142.50 targets the 145.00 area. Support now comes in at 140.20/30.      FTSE100 is expected to open 45 points lower at 7,514     DAX is expected to open 82 points lower at 15,941     CAC40 is expected to open 34 points lower at 7,227

UK retail sales could surprise to the upside, flash PMIs in focus - By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets fell for the fourth day in succession yesterday, driven lower on worries that central banks will look through concerns over a slowdown in economic activity and prioritise the battle against inflation, and look set to open lower this morning.     These concerns have been magnified in recent days with last week's hawkish Fed meeting, followed by the bigger than expected 50bps rate hikes from the Bank of England and Norges Bank yesterday, as investors started to worry that creating a possible recession was likely to become a necessary side-effect in their willingness to push inflation back down to their 2% targets. Certainly, the sticky nature of core inflation is causing a great deal of anxiety not only on the part of central bankers, but also on the part of those who are due to come off fixed rate mortgages in the next 12 months. The hope is that this period of high rates could soon give way to a softening later in the year, however the big rise in core inflation suggests that we may have to endure them for quite a bit longer.     On the plus side the lowering of the energy price cap next month is already seeing energy companies writing to customers and lowering their monthly direct debits with gas prices now back at 2021 levels. This should start to see headline inflation continue to decline into the end of the year.       While concerns over a possible recession are increasing, a lot of the economic data so far thisyear has proved to be reasonably resilient, which makes the timing of yesterday's decision to be more aggressive by the Bank of England a little bit after the fact.   For an economy that is wrestling with food price inflation of close to 20% the resilience seen in the UK consumer has been surprising so far this year, with clothing retailer Next surprising the market earlier this week when it upgraded its full year profits forecasts on better-than-expected trading activity.   Consumer confidence has improved as petrol prices have come down and certainly helped with some of that, however we also can't ignore the recent increase in interest rate costs that are likely to act as a drag in H2 of this year. In April we saw retail sales excluding fuel rise by 0.8%, partially reversing a sharp -1.4% decline in March, which in turn reversed a 1.4% gain in February.   The gain in April was even more surprising given the rise in tax rates, including council tax and other utility bills that kicked in at the start of the fiscal year.   For May estimates are for retail sales to fall by a modest -0.2%, even with recent updates from a few UK retailers pointing to continued resilience when it comes to spending patterns. We also have the latest flash PMI numbers for June which are likely to continue to exhibit one of the more notable trends we've seen in recent months, which has been an ongoing divergence between services sector activity and manufacturing activity.   This trend has also started to manifest itself in China which is seeing its manufacturing sector start to struggle.   In France manufacturing activity remained steady at 45.7, while Germany slipped back to 43.2 from 44.5. Both of these are expected to remain close to current levels.   Services continue to remain resilient but even here activity is cooling off a touch, with France slipping to 52.5 from 54.6, while Germany improved to 57.2 from 56. Again, these are expected to come in slightly weaker at 52.1 and 56.3.   In the UK the picture appears to be more upbeat, although even here manufacturing is struggling, coming at 47.1 in May, while services also slowed to 55.2 from 55.9. UK manufacturing is expected to soften to 46.8 and services to 54.8.     Lower fuel costs may offer some support here; however, most service providers are struggling with higher costs, which by and large they are having to pass on.    EUR/USD – pushed briefly back above the 1.1000 level yesterday before slipping back, with the main resistance at the April highs at 1.1095. This remains the next target while above the 50-day SMA at 1.0870/80 which should act as support. Below 1.0850 signals a move towards 1.0780.     GBP/USD – spiked up to 1.2850 yesterday before slipping back, however it remained above the lows this week at the 1.2680/90 area. Still on course for a move towards the 1.3000 area, while above the 50-day SMA currently at 1.2510, but needs to clear 1.2850.      EUR/GBP – failed between the 0.8630/40 area before slipping back. The main support is at least weeks low at the 0.8515/20 area. A move through 0.8640 could see a move towards 0.8680. While below the 0.8630 area the bias remains for a return to the recent lows.     USD/JPY – has finally cracked the 142.50 area, which is 61.8% retracement of the 151.95/127.20 down move, as it looks to close in on the 145.00 area. Support now comes in at 140.20/30.      FTSE100 is expected to open 27 points lower at 7,475     DAX is expected to open 120 points lower at 15,868     CAC40 is expected to open 53 points lower at 7,150

GBP: A sharply inverted yield curve can come in handy The pound’s neutral reaction to the Bank of England’s 50bp hike yesterday would suggest that was a well-telegraphed outcome. Instead, markets were only pricing in 35bp before the meeting. The market impact of the BoE’s surprise move must therefore be seen in the context of the pricing across the Sonia curve. 150bp of tightening was already priced in before the meeting, and investors are now looking at a 6.0%+ peak rate after the hike. The attempt by the BoE to get ahead of the curve with more aggressive tightening is being accompanied by rising speculation that this will trigger monetary easing starting in the summer of 2024. Still, that price development is not enough to impact the highly inverted shape of the GBP yield curve. From a currency perspective – as we note in the BoE review note – a sharply inverted yield curve can work as a positive factor for a reserve currency like the pound (as opposed to growth-sensitive currencies). We suspect that a rebound to 0.88 in EUR/GBP will need to be delayed on the back of that. The data calendar includes PMI releases in the UK today, with consensus expecting a marginal deterioration for both manufacturing and services. This morning, retail sales for the month of May declined less than expected.

European and US stock markets have seen a significant shift in sentiment over the past few days when it comes to the global economy. Rising bond yields, driven by more hawkish central banks, which has prompted investors to reassess the outlook when it comes to valuations and growth.     While European markets saw their biggest weekly loss since March, US markets also took a tumble, albeit the first one in 8 weeks, as a succession of central banks pledged that they had significantly further to go when it comes to raising rates. Bond markets also started to flash warning signs with yield curves becoming more inverted by the day whether they be France, Germany, or the UK. Friday's weak finish hasn't translated into a strongly negative vibe as we start a new week for Asia markets, even allowing for events in Russia at the weekend which aren't likely to have helped the prevailing mood, with the US dollar slightly softer this morning after getting a haven bid at the end of last week.     With economic data continuing to show varying signs of vulnerability, particularly in manufacturing the situation could have got even spicier over the weekend when Wagner Group boss Yevgeny Prigozhin set his troops on the road to Moscow in an insurrection against the Kremlin, and Russian President Vladimir Putin.   As it turns out a crisis was quickly averted when it was announced that Prigozhin would go into exile in Belarus, with any charges against him dropped, and Wagner troops would return to their bases. One can only imagine the reaction if that news had broken if markets had been open at the time, however it only adds to the general uncertainty surrounding the war in Ukraine and how quickly things can start to unravel.   This weekend's events also serve to indicate how fragile Vladimir Putin's position is given that one of his most trusted advisors suddenly went rogue.   As we look ahead to the final week of June and the end of the quarter, as well as the first half of the year we can reflect to some extent that markets have held up rather well when all things are considered. They have been helped in that by the sharp falls in energy prices back to pre-Russian invasion of Ukraine levels, as well as the low levels of unemployment which have served to keep demand reasonably resilient.     The elephant in the room has been the stickiness of core inflation as well as signs that demand is starting to falter, and this week we could get further confirmation of that trend.   Today we get the latest Germany IFO Business Climate survey for June, which if last week's flash PMI numbers are any guide could well show that the confidence amongst German business is faltering, with expectations of a slowdown to 90.6, from 91.7.     We also get flash CPI inflation numbers from Germany, France and the EU where headline prices are likely to show further signs of softening, with core prices set to remain sticky. At around the same time we get the latest PCE inflation numbers from the US for May.   These are likely to be important in the context of the Federal Reserve's stated intention to raise interest rates at least twice more before the end of the year.     In April the core PCE Deflator edged up from 4.6% to 4.7%, an area it has barely deviated from since November last year. You would have thought that even with the long lags seen from recent rate hikes they would start to have an impact on core prices.   This perhaps explains why central banks are being so cautious, even as PPI prices are plunging and CPI appears to be following.       EUR/USD – pushed briefly back above the 1.1000 level yesterday before slipping back, with the main resistance at the April highs at 1.1095. This remains the next target while above the 50-day SMA at 1.0870/80 which should act as support. Below 1.0850 signals a move towards 1.0780.     GBP/USD – currently holding above the lows of last week, and support at the 1.2680/90 area. Below 1.2670 could see a move towards the 50-day SMA. Still on course for a move towards the 1.3000 area but needs to clear 1.2850.      EUR/GBP – failed to rebound above the 0.8630/40 area last week. The main support is at last week's low at the 0.8515/20 area. A move through 0.8640 could see a move towards 0.8680. While below the 0.8630 area the bias remains for a return to the recent lows.     USD/JPY – has finally moved above the 142.50 area, which is 61.8% retracement of the 151.95/127.20 down move, as it looks to close in on the 145.00 area. This now becomes support, with further support at 140.20/30.      FTSE100 is expected to open 6 points higher at 7,468     DAX is expected to open 28 points higher at 15,858     CAC40 is expected to open 8 points higher at 7,171

GBP: No push back against 6%+ Bank Rate this week There is much discussion in the financial press about central bankers having seen the 'easy', base effect-driven decline in headline inflation. But now they are into the hard yards of getting core inflation down from around 5% – or in the Bank of England's case 7%. In this environment, we should expect no pushback from BoE officials on the pricing of the Bank Rate above 6% early next year. Equally, we expect the government to yield no ground on mortgage interest relief, which would only make the BoE's job harder. EUR/GBP fell on the back of the Eurozone PMI dip last Friday. Despite UK hard landing fears, we are sticking with the initial views we put out in our latest BoE reaction piece. Namely, that a very inverted yield curve probably trumps hard landing fears and that sterling holds onto recent gains for the time being.  On this week's UK calendar is primarily BoE speakers, where Wednesday looks to be the main Sintra event for BoE Governor Andrew Bailey. EUR/GBP can drift back to 0.8520 this week, while GBP/USD should find demand under 1.27.

Higher start expected for Europe as we drift towards quarter end    Despite weekend events in Russia, European markets proved to themselves to be reasonably resilient yesterday, finishing the day mixed even as the DAX and FTSE100 sank to multi week lows before recovering.     US markets didn't fare much better with the Nasdaq 100 sliding sharply, while the Russell 2000 finished the day higher. While equity markets struggled to make gains there wasn't any sign of an obvious move into traditional haven assets which would indicate that investors had significant concerns about what might come next.     If anything, given how events have played out over the last few years, and the challenges that have faced global investors, the view appears to be let's worry about what comes next when and if it happens, rather than worrying about what might happen in what is becoming an increasingly fluid geopolitical situation.   Bond markets appeared sanguine, as did bullion markets with gold finishing modestly higher, while the US dollar finished the day slightly lower, ahead of the start of this week's ECB central bank forum in Sintra, Portugal which starts today.     Oil prices found themselves edging higher yesterday, largely due to uncertainty over the weekend events in Russia given its position as a key oil and gas producer.   The prospect that we might see supply disruptions if the geopolitical situation deteriorates further may have prompted some precautionary buying. While the crisis appears to have passed quickly the fact that it happened at all has been a bit of a wakeup call and raised some concerns about future long term political stability inside Russia.     One other reason for the so far muted reaction to recent events is that we are coming to the end of the month as well as the first half of the year, with investors indulging in portfolio tweaking rather than any significant shift in asset allocation.   With H2 fast approaching the key decisions are likely to involve determining how many more rate rise decisions are likely to come our way, and whether we can avoid the prospect of a recession in the US.   As far as the UK is concerned it's going to be difficult to see how we can avoid one, having just about avoided the prospect at the end of last year, while the EU is already in one. The US continues to stand out, although even here there is evidence that the economy is starting to slow.     On the data front there isn't much in the way of numbers before the back end of the week and various inflation numbers from Germany, France and the EU, as well as the US. Today we have the latest US durable goods numbers for May, as well as housing data for April and May, which are expected to show signs of softening, and consumer confidence numbers for June. Consumer confidence has been one area which has proved to be the most resilient edging up in May to 102.3. This is expected to continue in June to 103.90, in a trend that appears to be matching the resilience of the labour market.     EUR/USD – not much in the way of price movement yesterday, with resistance back at last week's high just above the 1.1000 level, with the main resistance at the April highs at 1.1095. This remains the next target while above the 50-day SMA at 1.0870/80 which is acting as support. Below 1.0850 signals a move towards 1.0780.     GBP/USD – quiet session yesterday but still holding above the lows of last week, and support at the 1.2680/90 area. Below 1.2670 could see a move towards the 50-day SMA. Still on course for a move towards the 1.3000 area but needs to clear 1.2850.      EUR/GBP – struggling for momentum currently having failed at the 0.8630/40 area last week. The main support is at last week's low at the 0.8515/20 area. A move through 0.8640 could see a move towards 0.8680. While below the 0.8630 area the bias remains for a return to the recent lows.     USD/JPY – while above the 142.50 area, the risk is for a move towards 145.00. This support area which was the 61.8% retracement of the 151.95/127.20 down move, needs to hold or risk a return to the 140.20/30 area. as it looks to close in on the 145.00 area. This now becomes support, with further support at 140.20/30.      FTSE100 is expected to open 22 points higher at 7,475     DAX is expected to open 30 points higher at 15,843     CAC40 is expected to open 20 points higher at 7,204

GBP: No pushback against aggressive expectations Sintra is an important event for sterling as well. While tomorrow’s speech by Bank of England Governor Andrew Bailey is the most awaited event, today’s speech is by the two most dovish voices in the MPC: Silvana Tenreyro and Swati Dhingra. The former will be replaced in the committee by Megan Greene on 5 July and her remarks should have reduced market impact, while any hawkish comments by Dhingra may be read as a de-facto endorsement of the market’s aggressive tightening expectations. The Sonia curve is pricing in a 6.15-6.20% peak rate as of this morning around the turn of the year, and keeping the option of a 50bp hike in August very much on the table (44bp priced in). Data may argue against such aggressive action down the road, but the majority of Bank of England officials look unlikely to vehemently push back against tightening expectations for now. EUR/GBP does not have huge downside room, but a rebound to 0.88 will likely be very gradual.

Yen in focus as it falls to multiyear lows   After 6 days of declines, European markets managed to break their recent losing streak yesterday, closing marginally higher after a day when the direction could have gone either way. The catalyst for the recovery off the day's lows was a strong US session which was driven by two sets of strong US economic numbers. US consumer confidence for June hit its highest levels in 17 months, while new home sales jumped by 12.2%, the highest number in over a year. If the US economy is starting to struggle then there is little evidence of that in yesterday's numbers, which in turn helped drive a strong finish for US markets, led by the Nasdaq 100.     Yesterday's resilience came in spite of another slide in crude oil prices, which have continued to suffer under the weight of concerns about a slowing global economy and a drop in demand over the second half of the year. The increased stridency of hawkish central bank rhetoric coming out of Sintra in Portugal at the ECB central bank conference, when it comes to future rate hikes is helping to drive yields higher, yet stock markets appear unfazed.     Yesterday we heard from several ECB governing council members, including President Christine Lagarde pushing back against the idea of rate cuts in 2024, as well as signalling a commitment to another rate hike at the July meeting. This seems set in stone now, although this week's June flash CPI number might cast some doubts as to whether the rate hikes might continue beyond July. Today's speaker slate at Sintra could well create more headlines with the likes of Bank of England Governor Andrew Bailey, Bank of Japan governor Kazuo Ueda, Fed chair Jay Powell and Christine Lagarde speaking on a panel discussing monetary policy.     Of particular interest will be any comments from Governor Ueda given the declinesseen in the Japanese yen over the past few days, seeing it sink to 15-year lows against the euro, as well as 8-year lows against the pound, and record lows against the Swiss franc in the last 24 hours. We've already heard from Japanese Finance Minister Suzuki in the last couple of days warning that excessive movements in the yen might prompt an appropriate response. While yen traders are focussing on the 145.00 area against the US dollar it can't have escaped their attention that their currency is getting hit even harder away from the spotlight of the greenback. If a response is coming it could well come soon.     Staying with currencies the Australian dollar plunged overnight after headline CPI slowed sharply on May from 6.8% to 5.6%, well below forecasts of 6.1%, and with the RBA meeting next week this slowdown could prompt the central bank to re-pause the pace of the current rate hiking cycle.   After the European close we also get the latest results from the US bank stress tests, which couldn't be more timely given recent events in March, however they aren't likely to offer much insight into what took place, as the US regional banks were not covered under the various scenarios, as they were considered too small and not systemically important enough. This was a major oversight, as recent experience in Europe has taught us, and particularly in Spain over 10 years ago, where a large cohort of Spanish Cajas nearly brought the economy to its knees and resulted in a banking bailout. Just because a bank is small doesn't mean it won't cause a financial meltdown if its troubles spread. The tests also had a rather big flaw in them in that they didn't factor a sharp rise in interest rates into any of the scenarios, the very scenario that started the dominos tumbling with the collapse of SVB.     EUR/USD – holding above the 50-day SMA and support at the 1.0870/80 area. We have resistance back at last week's high just above the 1.1000 level, with the main resistance at the April highs at 1.1095. Below 1.0850 signals a move towards 1.0780.     GBP/USD – a positive session yesterday holding above the lows of last week, and support at the 1.2680/90 area. Below 1.2670 could see a move towards the 50-day SMA. Still on course for a move towards the 1.3000 area but needs to clear 1.2850.      EUR/GBP – appears to be building up to move higher but needs to move through the 0.8630/40 area. The main support is at last week's low at the 0.8515/20 area. A move through 0.8640 could see a move towards 0.8680. While below the 0.8630 area the bias remains for a return to the recent lows.     USD/JPY – continues to edge higher towards the 145.00 area. We have support at the 142.50 area, which was the 61.8% retracement of the 151.95/127.20 down move. A fall below this support area could see a deeper fall towards 140.20/30.      FTSE100 is expected to open 19 points higher at 7,480     DAX is expected to open 45 points higher at 15,892     CAC40 is expected to open 25 points higher at 7,240       By Michael Hewson (Chief Market Analyst at CMC Markets UK)  

GBP: Bailey may not offer any rate pushback Bank of England Governor Andrew Bailey (in the same panel with Lagarde and Powell) and Chief Economist Huw Pill will speak in Sintra today, and, like in recent circumstances, they are facing the pressure of very aggressive market pricing for BoE tightening. The Sonia curve is pricing in 118bp of additional hikes ahead, with a peak rate now seen closer to 6.25% than 6.0%. The question is, once again, whether BoE officials will offer any kind of pushback against those tightening expectations, perhaps to offer some respite to the troubled UK mortgage market. That hardly seems like a logical move in our view after the hawkish 50bp hike last week and before having seen evidence that price pressures are abating at all. Arguably, the bar for a hawkish surprise is also quite high, but markets have shown some clear lenience towards hawkish BoE repricing, and we could see the short-term GBP rates staying supported barring any dovish hints by Bailey or Pill. EUR/GBP should, in such an environment, remain quite depressed, and we could see it struggle to sustain a rally beyond the 0.8620/30 area.

German inflation in focus, ahead of US Q1 GDP       Having stopped the rot on Tuesday, ending a 6-day losing streak, European markets saw another positive session yesterday, although gains were tempered by remarks from Fed chairman Jay Powell who warned that several more rate hikes could be expected in the coming months, in comments made in an ECB panel discussion in Sintra, Portugal.     US markets finished the day mixed with little in the way of direction, as they digested the various remarks from central bankers, as they all peddled a similar narrative, of further rate rises to come. The Japanese yen continued to decline, already at record lows on a trade-weighted basis, Bank of Japan governor Kazuo Ueda gave little indication that officials were any close to stemming the recent losses. The subdued finish in the US is likely to translate into a flat European open.     There is the hope that upcoming data could prompt a softening of this hawkish message starting today with the latest June inflation numbers from Germany. We've seen a sharp deceleration in the last few months, falling from 7.6% in April to 6.3% in May. Today's June numbers could see a modest increase to 6.8%, which will do little to assuage ECB concerns that inflation is falling back sharply. In the UK the sharp rise in gilt yields in the wake of surging inflation is prompting concerns about the housing market, and more specifically the ability of consumers to pay their existing mortgage or take out new ones.        Since the start of the year, we've seen a modest improvement in mortgage approvals, after they hit a low of 39.6k back in January. The slowdown towards the end of last year was due to the sharp rise in interest rates which weighed on demand for property, as well as weighing on house prices.     As energy prices have come down, along with lower rates at the start of the year, demand for mortgages picked up again with March approvals rising to 51.5k, before slipping back to 48.7k in April. This could well be as good as it gets for a while with the renewed increase in gilt yields, we've seen in the past few weeks, prompting weaker demand for new borrowing. Similarly net consumer credit has also started to improve after similar weakness.     Although inflationary pressures are starting to subside, the increase in wages is unlikely to offset concern over higher rates and higher mortgage costs in the coming months. Given current levels of uncertainty, consumer credit numbers could well increase further, while net lending could see a further decline after April lending fell by -£1.4bn, the weakest number since July 2021.     We also have the final iteration of US Q1 GDP, which was revised up to 1.3% from 1.1% a few weeks ago. The main drag was down to a bigger than expected scaling down in inventories, as well as an upward revision to personal consumption to 3.8%, which was a significant improvement from 1% in Q4, as US consumers went out on a New Year splurge.     Slightly more concerning was rise in core PCE over the quarter, from 4.4% in Q4 to 5%. We're not expecting to see much of a change in today's revisions, although headline might get revised to 1.4%, while most of the attention will be on the core PCE number for evidence of any downward revisions, as more data gets added to the wider numbers. Weekly jobless claims are expected to come in unchanged at 265k.   EUR/USD – holding above the 50-day SMA and support at the 1.0870/80 area, but unable to move through the 1.1000 level. The main resistance remains at the April highs at 1.1095. Below 1.0850 signals a move towards 1.0780.   GBP/USD – slid back sharply below the 1.2670 area, now opens a move towards the 50-day SMA at 1.2540. If this holds, we remain on course for a move towards the 1.3000 area.    EUR/GBP – broken above 0.8630, heading towards the 50-day SMA at 0.8673, which is the next resistance area. Support comes in at the 0.8580 area.   USD/JPY – continues to edge higher towards the 145.00 area. We have support at the 142.50 area, which was the 61.8% retracement of the 151.95/127.20 down move. A fall below this support area could see a deeper fall towards 140.20/30.    FTSE100 is expected to open 2 points higher at 7,502   DAX is expected to open 7 points higher at 15,956   CAC40 is expected to open 10 points higher at 7,296   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  

GBP: Some underperformance The Bank of England's broad trade-weighted index for sterling has barely budged since last Thursday's 50bp BoE rate hike, where sterling strength against some currencies presumably makes up for some modest weakness against the dollar and the euro. 10-year UK gilt yields - which had briefly fallen on the large hike - equally have barely budged. Where sterling bears may find some solace is that UK large and mid-cap equities have only rallied 0.7% this month - compared to 3% gains for their European peer group. In short, we think it is too soon to start selling sterling on hard landing fears. We think sterling only sells off when the data - both inflation and labour market data - suggest the BoE can ease up in its hawkishness. Until then GBP/USD might find some support near 1.2600 and EUR/GBP could easily drift back under 0.8600.

Inflation numbers a key focus as we round off the quarter       European markets continued their recent patchy performance, as we come to the end of the week, month, quarter, and half year, with the FTSE100 sliding back while the likes of the DAX and CAC40 were slightly more resilient, after German inflation came in slightly higher than expected in June.   US markets were slightly more positive, but even here the Nasdaq 100 struggled after a sizeable upward revision to Q1 GDP to 2%, and better than expected weekly jobless claims numbers sent US yields sharply higher to their highest levels since March, while the US dollar also hit a 2-week high.   The surprising resilience of US economic data this week has made it an absolute certainty that we will see another rate increase in July, but also raised the possibility that we might see another 2 more rate increases after that.   The resilience of the labour market, along with the fact that core inflation remains sticky also means that it makes the Federal Reserve's job of timing another pause much more difficult to time. Today's core PCE Deflator and personal spending numbers for May could go some way to making that job somewhat easier.   Core PCE Deflator is forecast to remain unchanged at 4.7%, while personal spending is expected to slow from 0.8% to 0.2%. While the Federal Reserve isn't the only central bank facing a sticky inflation problem, there is evidence that it is having slightly more success in dealing with it, unlike the European Central Bank which is seeing much more elevated levels of headline and core prices. Yesterday, we saw CPI in Germany edge higher from 6.3% in May to 6.8%, while in Spain core prices rose more than expected by 5.9%, even as headline CPI fell below 2% for the first time in over 2 years.   Today's French CPI numbers are expected to show similar slowdowns on the headline rate, from 5.1% to 4.6%, but it is on the core measure that the ECB is increasingly focussing its attention. Today's EU flash CPI for June is forecast to see a fall to 5.6% from 6.1%, however core prices are expected to edge back up to 5.5% after dropping to 5.3% in May. Compounding the ECB's and other central banks dilemma when it comes to raising rates is that PPI price pressures are falling like a stone and have been since the start of the year, in Germany and Italy. In April French PPI plunged -5.1% on a monthly basis, even as the year-on-year rate slowed to 7% from 12.8%.   If this trend continues today then it might suggest that a wave of deflation is heading our way and could hit sometime towards the end of the year, however while core prices remain so resilient central banks are faced with the problem of having to look in two different directions, while at the same time managing a soft landing. The Bank of England has an even bigger problem in getting inflation back to target, although it really only has itself to blame for that, having consistently ignored regular warnings over the past 18 months that it was behind the curve. The risk now is over tightening just as prices start to fall sharply.   Today's Q1 GDP numbers are set to confirm that the UK economy managed to avoid a contraction after posting Q1 growth of 0.1%, although it was a little touch and go after a disappointing economic performance in March, which saw a monthly contraction of -0.3% which acted as a drag on the quarter overall.   The reason for the poor performance in March was due to various public sector strike action from healthcare and transport, which weighed heavily on the services sector which saw a contraction of -0.5%. The performance would have been worse but for a significant rebound in construction and manufacturing activity which saw strong rebounds of 0.7%.   There is a risk that this modest expansion could get revised away this morning, however recent PMI numbers have shown that, despite rising costs, business is holding up, even if economic confidence remains quite fragile.     One thing we do know is that with the recent increase in gilt yields is that the second half of this year is likely to be even more challenging than the first half, and that the UK will do well to avoid a recession over the next two quarters.       EUR/USD – slid back towards and below the 50-day SMA, with a break below the 1.0850 area, potentially opening up a move towards 1.0780. Still have resistance just above the 1.1000 area.     GBP/USD – continues to come under pressure as we slip towards the 50-day SMA at 1.2540. If this holds, the bias remains for a move back to the 1.3000 area. Currently have resistance at 1.2770.       EUR/GBP – currently being capped by resistance at the 50-day SMA at 0.8673, which is the next resistance area. Behind that we have 0.8720. Support comes in at the 0.8580 area.     USD/JPY – briefly pushed above 145.00 with the November highs of 147.50 beyond that.  Support remains at the 142.50 area, which was the 61.8% retracement of the 151.95/127.20 down move. A fall below this support area could see a deeper fall towards 140.20/30.    FTSE100 is expected to open 18 points higher at 7,489     DAX is expected to open 12 points higher at 15,958   CAC40 is expected to open 8 points higher at 7,320      

The last six months have been an eventful one for equity markets in general with many of the questions that we were faced with at the start of the year, still just as relevant now.   The main question was whether the rebound that started from the lows back in October was simply part of a bear market rally, or whether it was the beginning of a move towards new record highs.   Others included how many more rate hikes could we expect to see, and when would rates start to come down again, with markets pricing in rate cuts in the second part of 2023.   We got the answer to the main question with new record highs for the FTSE100, CAC 40 and the DAX, while US markets also managed to continue their strong performance, breaking out of their own downtrend from their 2021 peaks, during February, shrugging off a March wobble in the process.   Despite the records highs being set by European markets in the first half of this year, one index above all the others has disappointed, that being the FTSE100, which managed to get off to a flier in the early part of the year, hitting a record high above 8,000, before sinking to a six-month low in the space of 4 weeks. Of all the major indices its greater weighting towards banks, and commodities has seen it underperform, largely due to the weakness of the rebound in the Chinese economy, and the fall in oil and gas prices.   The FTSE100 aside, what has been surprising is that, aside from a couple of exceptions, the stock market gains of the last few months have given few signs of disappearing despite interest rates that are significantly higher than they were at the start of the year, with little sign that they will come down any time soon.   That fact alone is a significant shift from where we were at the start of the year, where we had bond markets pricing in rate cuts as soon as Q3 of this year. This always came across as wishful thinking on the markets part, however we've shifted to the other side of the spectrum of market pricing in the prospect of another 100bps of rate hikes by the Bank of England by the end of the year.   In the same way that rate cuts by year end proved to be mispriced, at the start of the year, this pricing by the market could well go the same way.   One thing that has come as a surprise is how resilient equity markets have been in the face of a much sharper rise in 2-year yields from where we were in early January.   What's more there is no sign that central banks are in any mood to slow down their pace of rate hikes, something that is very much reflected in the way 2-year yields have pushed higher this year. US 2-year yields are higher by almost 50bps year to date, UK 2-year gilt yields by an astonishing 169bps, and German 2-year yields by 43bps.   This big jump in UK yields has seen the pound outperform against its peers, rising by 5% against the US dollar, and by as much as 13.5% against the Japanese yen.   While financial markets try to determine how many more rate hikes are coming, the next question is how long they will have to stay at current levels, and what happens when the deflation that is already being seen in the PPI numbers starts to manifest itself in the core inflation numbers.   For now, there is little evidence of that happening with the focus this week more on the continued divergence between manufacturing and the services sector in the form of the PMI numbers, as well as the US payrolls numbers on Friday.     Today's manufacturing PMIs are set to confirm the weak nature of this part of the global economy, with Spain, Italy, France, and Germany PMIs all forecast to slip back to 47.9, 45.3, 45.5, and 41 respectively. UK and US are also expected to remain soft at 46.2 and 46.3 respectively, while the US ISM manufacturing survey, is also forecast to remain below 50, at 47.2, with prices paid at 44.     Markets are already pricing in further rate hikes this month from the Federal Reserve, as well as the ECB, followed by the Bank of England in August, however the bigger question is what comes after these. One suspects we may not see many more after these hikes, however for now markets seem reluctant to come to that conclusion.   That said as we look towards H2 the bigger question is having seen such a positive H1, is there anything left in the tank, to build on those gains over the course of the rest of the year?   A decent Asia session looks set to translate into a positive start for European markets although current unrest in France is likely to prompt questions about economic activity there in the coming weeks.         EUR/USD – finding support at the 1.0830/40 area and 50-day SMA for now, with resistance remaining at the 1.1000 area. A break below the lows last week opens the way for a potential move towards 1.0780.     GBP/USD – still holding above the 50-day SMA at 1.2540, as well as trend line support from the March lows. If this holds, the bias remains for a move back to the 1.3000 area. Currently have resistance at 1.2770.       EUR/GBP – capped last week just below resistance at the 50-day SMA which is now at 0.8663. Behind that we have 0.8720. Support comes in at the 0.8570/80 area.     USD/JPY – saw a key reversal day after popping above 145.00 last week. We currently have support at the 143.80 area, with a break below targeting the 142.50 area. Above 145.20 opens up 147.50.      FTSE100 is expected to open 32 points higher at 7,563     DAX is expected to open 50 points higher at 16,198     CAC40 is expected to open 30 points higher at 7,430

GBP: Pricing remains volatile Pricing for Bank of England tightening remains quite volatile. Markets are pricing in 130bp of BoE hikes to the peak at the moment, which clearly sets the bar quite hike for hawkish surprises for the MPC's communication, but also shows how hawkish-prone markets are given the UK inflation situation. This week will offer little input from the data side in the UK, and the list of BoE speakers is also quite short. Cable may be primarily driven by the dollar leg, and faces some risk of a correction. EUR/GBP may struggle to find very sustainable support beyond current levels.

Europe set for flat open, as RBA stays on hold         Yesterday saw a snoozy start to July for European markets with an initially positive open giving way to a mixed session, with US markets only opening for a short time ahead of the US Independence Day holiday today.     US markets finished their shortened trading session making some modest gains, but interest was relatively low-key with the latest ISM manufacturing numbers for June pointing to continued weakness in that part of the US economy.     On a more positive note, if you can call it that, the weak prices paid component of the data showed that inflationary pressure has continued to ease and as such might offer the hope that a July rate hike from the Fed could well be the last one before a lengthy pause.     European manufacturing PMIs also exhibited similar weakness in their respective components, with varying degrees of contraction, however there was a common theme running through them, which was declining output, as well as falls in new orders.     In the UK numbers we also saw reports of falling input costs due to lower fuel costs, commodity price decreases, and improvements in supply chains. Average output prices also fell for the first time since April 2016. These trends would appear to suggest that for all the hawkish narrative coming from central bankers that a wave of disinflation is working its way through the global economy, and that if they aren't careful, they could end up over tightening at a time when inflation is already on a downward path.     That said, central banks biggest problem is that they are so wedded to their 2% inflation target that rather than accepting the fact it may take years to fall back to that level, they risk breaking something in order to get it back there quicker.     Earlier this morning the Reserve Bank of Australia took the decision to follow up its surprise 25bps rate hike of last month, by deciding to keep rates on hold, albeit with the same hawkish bias as last month. The central bank statement went on to say that inflation was still too high and that more tightening may well be required.     With meetings occurring on a monthly basis the bank appears to have decided to wait and see the effects recent rate hikes have had on the wider economy, as well as waiting to see what other central banks do later this month, even though we pretty much know that further rate hikes are coming from the likes of the Federal Reserve and ECB.     With the labour market looking strong, services inflation still looking sticky it remains unlikely that we've seen the terminal rate yet for the Australian dollar, with markets pricing at least another 38bps of hikes by year end, although this number could come down.     Today's European session looks set to be a quiet one with the US off for the 4th July holiday, and little in the way of economic data ahead of tomorrow's services PMI numbers for June which are likely to make for better reading from an economic resilience point of view.           EUR/USD – continues to find support in and around the 1.0830/40 area and 50-day SMA, with resistance remaining at the 1.1000 area. A break below the lows last week opens the way for a potential move towards 1.0780.     GBP/USD – while above the 50-day SMA at 1.2540, as well as trend line support from the March lows, bias remains higher for a move back to the 1.3000 area. Currently have resistance at 1.2770.       EUR/GBP – finding support between 0.8570/80 area, with resistance at the 50-day SMA which is now at 0.8663. Behind that we have 0.8720. Below 0.8560 targets 0.8520.     USD/JPY – slipped back to the 144.00 area yesterday before rebounding but has so far held below 145.00. The key reversal day remains intact while below 145.20.  A break below 143.80 targets a move back to the 142.50 area. Above 145.20 opens up 147.50.      FTSE100 is expected to open unchanged at 7,527     DAX is expected to open 19 points higher at 16,100     CAC40 is expected to open unchanged at 7,386     By Michael Hewson (Chief Market Analyst at CMC Markets UK)

Services PMIs and Fed minutes in focus By Michael Hewson (Chief Market Analyst at CMC Markets UK) In the absence of US markets yesterday, European markets underwent a modestly negative session on a fairly quiet day, and look set to open modestly lower this morning, with Asia markets drifting lower. For the past few days, markets have been trading in a broadly sideways range with little in the way of momentum, as investors weigh up the direction of the next move over the next quarter.   The last few weeks have been spent obsessing about the timing of a possible recession, particularly in the US, with the timing getting slowly pushed back into 2024, even as bond markets flash warnings signs that one is on the horizon.     As we look ahead to Friday's US payrolls report, speculation abounds as to how many more central bank rate hikes are inbound in the coming weeks, against a backdrop of economic data that by and large continues to remain reasonably resilient, manufacturing notwithstanding.     Despite the dire start of manufacturing activity as seen earlier this week, services have held up well, although we are now starting to see some pockets of weakness. A few days ago, in the flash numbers France saw a sharp fall in economic activity, sliding from 52.5 to 48 for June, although activity in the rest of the euro area remains broadly positive.     This is an area of the economy that could help boost economic activity, particularly in Italy and Spain now we're in the holiday season and has seen these two countries perform much better in recent months. The outperformance here could even help avert a 3rd quarter of economic contraction for the euro area.       Expectations for Spain and Italy are 55.7, and 53.1, modest slowdowns from the numbers in May, while France and Germany are expected to slow to 48 and 54.1.     We're also expected to see a positive reading from the UK, albeit weaker from the May numbers at 53.7. US PMI numbers are due tomorrow given the July 4th holiday yesterday.     Later today with the return of US markets, we get a look at the most recent Fed minutes, when the FOMC took the collective decision to keep rates on hold, with the likelihood we will see a resumption of rate hikes later this month.     In the lead-up to the decision there had been plenty of discussion as to the wisdom of pausing given how little extra data would be available between the June and July decisions. The crux of the argument was if you think you need to hike again, why wait until July when the only data of note between the June and July decisions is one payrolls report, and one set of inflation numbers.     All of that is now moot however and while inflation has continued to soften, the labour market data hasn't. Here it remains strong with tomorrow's June ADP report, the May JOLTs report, weekly jobless claims, as well as Friday's June payrolls numbers.     Tonight's minutes may offer up further clues as to the Fed's thinking when it comes to why they think that two more rate hikes at the very least will be needed by the end of this year.     A few members changed their dots to reflect the prospect that they were prepared to raise rates twice more by the end of the year, with a hike in July now almost certain. This stance caught markets off guard given that pricing had been very much set at the prospect of one more rate hike, before a halt.     A key part of the thinking may have been the Fed's determination that markets stop pricing rate cuts by the end of this year. This insistence of pricing in rate cuts by year end has been one of the key characteristics that has helped drive recent gains in stock markets.     This has now been largely priced out, so in this regard the Fed has succeeded,   The key now is to make sure that the Federal Reserve, along with other central banks, while prioritising pushing inflation down, don't break something else, and start pushing the rate of unemployment sharply higher.   This is the balancing act central banks will now have to perform, and here it might be worth them exercising some patience. Given the lags being seen in the pass through of monetary policy it may be that a lengthy pause after July, keeping rates at current levels for months, is a wiser course of action than continuing to raise rates until the tightrope snaps, and the whole edifice comes tumbling down.       Today's minutes ought to give us an indication of the thought processes of the more dovish members of the FOMC, and how comfortable they are with the prospect of this balance of risks.             EUR/USD – remains range bound with support around the 1.0830/40 area and 50-day SMA, with resistance remaining at the 1.1000 area. A break below the lows last week opens the way for a potential move towards 1.0780.     GBP/USD – still looking well supported above the 50-day SMA at 1.2540, as well as trend line support from the March lows, bias remains higher for a move back to the 1.3000 area. Currently it has resistance at 1.2770.       EUR/GBP – rolling over again yesterday, sliding below the 0.8570/80 area, and looks set to retarget the 0.8520 area. Resistance remains at the 50-day SMA which is now at 0.8655. Behind that we have 0.8720.     USD/JPY – currently capped at the 145.00 area, with support at the 144.00 area this week.  The key reversal day remains intact while below 145.20.  A break below 143.80 targets a move back to the 142.50 area. Above 145.20 opens up 147.50.      FTSE100 is expected to open 5 points lower at 7,514     DAX is expected to open 28 points lower at 16,011     CAC40 is expected to open 23 points lower at 7,347

US ADP and JOLTs data a key focus today. European markets have fallen every day this week, although yesterday's losses were by far the worst, and look set to continue again today. US markets also struggled yesterday, although their losses have been much more modest. Yesterday's weakness was driven by concerns over softer than expected Chinese as well as European services PMIs, which fed into increased slowdown worries, as well as rising interest rate risk, which fed into weakness in basic resources, energy and financials, and has translated into further weakness in Asia markets.     Today's Germany factory orders numbers for May could signal a brief respite after 2 months of weakness with a rebound of 1%, up from -0.4% in April, although on an annualised basis it is expected to decline by -9.7%, the 15th month in a row it's been in negative territory.       The release of last night's Fed minutes showcased some significant splits amongst policymakers over the decision to signal a rate pause in June, citing "few clear signs" of progress that US inflation was falling quickly enough.     Some officials wanted to carry on with rate hikes of 25bps but given the "uncertainty" about the outlook it was decided a pause would be preferable, just so long as it was made clear that the door to a July hike, as well as further hikes was pushed to the top of the narrative. This helps to explain the very hawkish guidance with no rate cuts expected by Fed officials until 2024.     The publication of the minutes, and the clear willingness amongst many members to do more on rates saw US 2-year yields close higher on the day, wiping out their early declines.     The committee noted the strength of the US labour market saying it "remained very tight" evidence of which is likely to be borne out by today's data from the JOLTS data for May, the latest weekly jobless claims and the June ADP payrolls report, as well as the latest ISM services numbers.     The resilience of the US labour market was no better illustrated than in the April JOLTS report which saw vacancy numbers surge back above 10m from 9.7m in March. Today's May numbers are expected to see this number drop back to 9.9m, still an eye wateringly higher number, and well above the levels we saw pre-pandemic.     Weekly jobless claims also appear to have hit a short-term peak sliding back from 265k to 239k last week and are expected to edge higher to 245k. While weekly claims have been rising in recent weeks continuing claims have been falling, slipping to a 3-month low last week of 1,742k.     Today's ADP payrolls report is expected to see another solid number of 225k, down slightly from 278k.     While the number of job vacancies available remains at current levels it's hard to imagine a scenario where we might see a weak jobs report in the coming months, which means that its unlikely to be the labour market that prompts the Fed to signal a pause in the near term.     Services inflation has been the one area which the Fed has expressed concern that it might be stickier than it needs to be.     Today's ISM services report is expected to see headline activity edge higher to 51.3, while a close eye will be kept on prices paid which slowed to 56.2 in May, and a 3-year low.        EUR/USD – looks set for a test of support around the 1.0830/40 area and 50-day SMA, with resistance remaining at the 1.1000 area. A break below the lows last week opens the way for a potential move towards 1.0780.   GBP/USD – still in a tight range with support above the 50-day SMA at 1.2540, as well as trend line support from the March lows, bias remains higher for a move back to the 1.3000 area. Currently have resistance at 1.2770.     EUR/GBP – looks set to retarget the 0.8515/20 area and June lows, while below resistance at the 0.8570/80 area. Below 0.8510 targets the 0.8480 area. We also have resistance remaining at the 50-day SMA which is now at 0.8655. Behind that we have 0.8720.   USD/JPY – looks set for a test of the 143.80 area, while below the key resistance at 145.20. A break below 143.80 targets a move back to the 142.50 area. Above 145.20 opens up 147.50.    FTSE100 is expected to open 30 points lower at 7,412   DAX is expected to open 84 points lower at 15,853   CAC40 is expected to open 50 points lower at 7,260

GBP: Watch for data outliers Today’s focus will be on the Bank of England’s Decision Maker survey, which has pointed to easing pay and price expectations over the coming months. Hard data has pointed in the opposite direction, and this might emerge again as an outlier in a very “hawkish” set of data for the BoE and markets today. Markets remain highly sensitive to any incoming developments on the price side and the still quite aggressive BoE tightening expectations (140bp by January 2024) do point to some risk of recalibration (and GBP downside risks) around any release. EUR/GBP has been weakening in the past two sessions, but may find some support around current levels and even converge back to 0.8600 as the overbought pound faces some BoE repricing threat.  

Inflation front and centre this week as China slips towards deflation By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets underwent a shocker of a week last week, posting their biggest declines since March, despite a modest rebound on Friday. With economic data continuing to look on the soft side and central banks showing little sign of easing up when it comes to interest rate rises there was little to cheer for markets in Europe, with concerns about weakness in the Chinese economy adding to the gloom.   US markets on the other hand, while still finishing the week lower, still managed to perform better after a slightly weaker than expected non-farm payrolls job report, which showed that the US economy added 209k jobs in June, down from 306k in May. There was also a 2-month net revision lower of -110k, taking some of the lustre off recent gains, and removing some of the euphoria around the ADP jobs number of 497k, the day before. The unemployment rate still fell to 3.6%, while average hourly earnings growth came in unchanged at 4.4%, which was at a slightly higher level than expected. One thing that we were able to take away from last week was that further rate rises from the Federal Reserve as well as the European Central Bank are almost certain when they both meet in 2 weeks' time, however there is now rising concern that we may see further rate increases after that in September as well.     The bond market is certainly reflecting the fact that rates are likely to stay higher for longer after the yield curve steepened as 10-year yields outperformed 2-year yields on a week-on-week basis.   With earnings season set to get underway in earnest over the next week or so, there is increasing nervousness that after such a good first half of the year, that the second half of the year is likely to be much more challenging.   What last week's economic data also tells us is that while the economy in Europe could well be set to contract for the third successive quarter in succession, the US economy appears to be holding up reasonably well There is a fear however that central banks are on the cusp of a serious policy mistake when it comes to their determination to drive inflation lower. We already know that inflation has been slowing sharply over the last few months, and we also know that PPI inflation in China and Europe is now in negative territory.       This morning we saw that inflation in China slowed even further in June with headline CPI coming in at 0%, and PPI slipping from -4.6% in May to -5.4% That alone suggests that the rate hikes that have already been implemented over the past 15 months have had an effect, however such is the nature of monetary policy, and the way interest rate markets have changed over the last 20 years, with many more fixed rate loans, there is no way of telling how much more tightening has yet to come through.     This should make central bankers much more cautious, however it seems to be having the opposite effect, causing frustration that inflation isn't coming down quickly enough, due to resilient consumption patterns. With US CPI for June set to be released on Wednesday, and PPI on Thursday we are likely to see further evidence of this disinflationary trend, even while wages growth remains resilient. These are the key macro items for investors to mull over this week ahead of the Federal Reserve later this month, while in the UK tomorrow we have the latest wages and unemployment numbers for the 3-months to May, which are expected to show strong wages growth against a backdrop of a tight labour market.           EUR/USD – broke higher last week after finding solid support around the 1.0830/40 area. We need to see a move above the June highs at 1.1010/15 to target a move towards 1.1100, and the highs this year. A break below the lows last week opens the way for a potential move towards 1.0780.     GBP/USD – broke above resistance at the 1.2770/80 area putting it on course for a move towards the 1.3000 area, but needs to take the 1.2850 area and June highs first. Support comes in at the 1.2770/80 area, and below that at 1.2680.      EUR/GBP – continues to find support at the 0.8515/20 area and June lows. Also has resistance at the 0.8570/80 area. We also have resistance at the 50-day SMA which is now at 0.8635. Below 0.8500 targets 0.8460.     USD/JPY – fell below the 144.00 area triggering stops all the way to the 142.00 area, also falling below support at 142.50. Posted a weekly reversal suggesting the top is in and the risk of a return to the 139.80 area. We need to see a move back above 142.80 to stabilise and argue for a return to 144.00.       FTSE100 is expected to open 3 points lower at 7,254     DAX is expected to open unchanged at 15,603     CAC40 is expected to open 14 points lower at 7,098  

GBP: Tomorrow's wage data are key With a month to go until the next Bank of England meeting, policymakers will be watching regular pay growth (average earnings excluding bonuses) tomorrow, which has picked up again lately. The question is whether that’s solely down to firms implementing the 10% increase in the National Living Wage, or a genuine increase in pay pressures. Assuming it’s at least partly the former, we think we could get a fractional fall in the annual rate of pay growth in the May reading. Unless the CPI shocks on the upside again on July 19, then the Bank of England could be happy with a 25bp hike in August. Markets are pricing in 44bp for August and 145bp in total, which leaves ample room for a dovish repricing to hit sterling should data surprise on the downside. EUR/GBP is trading around recent lows and may be facing some upside risks to 0.8600+ this week.

UK gilt yields in focus, ahead of latest wages data By Michael Hewson (Chief Market Analyst at CMC Markets UK)     European markets managed to procure a second successive day of gains yesterday, despite a slide in Asia markets, after Chinese inflation slipped further towards deflation. The FTSE100 also managed to eke out a daily gain for the first time this month bringing an end to a sequence of 5 successive daily losses.     US markets also underwent a cautious start to the week with attention focussed on this week's inflation numbers, which are due tomorrow and could go some way to indicating whether we see any more rate hikes beyond this month.   While last week's losses were largely predicated on concerns that central banks were gearing up for multiple rate rises in the coming months, the data out of China appears to suggest that the bigger danger in the coming months might be deflation. Today's final Germany inflation numbers are expected to confirm that June CPI rose to 6.8% from 6.3% in May, although most of that rise appears to have been attributed to one-off factors that won't be repeated in the coming months, after temporary reductions in rail fares were reversed.     The pound had a slightly softer tone yesterday after a private sector survey showed that wage growth is starting to slow along with the pace of hiring in June. There has been little evidence of this trend in any other recent data, although with the latest ONS numbers due today there is more of a lag.     Just over a month ago the April UK wages numbers reinforced the challenge facing the Bank of England, after wage growth surged to 7.2%, and a record high outside of the pandemic, prompting a surge in UK 2-year gilt yields which took them above their October peaks of last year in the wake of the ill-fated Kwarteng budget.     The surge in the last few months wages has served to highlight the abject policy failure of the Bank of England to act early enough, as workers already being squeezed on all sides agitate for bigger pay rises in order to close the real wages gap. Today's May wages data is unlikely to see much evidence of a weakening in these upward pressures with expectations of 7.1% for the 3-months to May.       Short term yields have continued to rise in anticipation of further rate rises in the coming months, although we have seen a pullback in the last couple of days, from 15-year highs in UK 2-year yields. If today's wage numbers continue to look sticky, the central bank may find it has no good options when it comes to getting prices under control.     The number of people in employment also rose to a record 76% as high food inflation forced people back into work, forcing the unemployment rate down to 3.8%, where it looks set to stay this month. It's also important to note that the wages numbers are average numbers which means in a lot of cases, pay rises are much higher in certain areas of the economy, trending at between 10% to 20%. This trend may slow in the coming months; however, it is unlikely to slow rapidly even as headline inflation starts to come down rapidly after July.     Later on, this morning, the July German ZEW survey is expected to show a further deterioration in expectations sentiment to -10.6 down from -8.5, with the current situation expected to fall to -62, from -56.5.               EUR/USD – We need to see a move above the June highs at 1.1010/15 to target a move towards 1.1100, and the highs this year. A break below the lows last week at 1.0830, opens the way for a potential move towards 1.0780.     GBP/USD – fell back to 1.2750 yesterday, before making new 14-month highs nudging above the June highs, as we continue to look for a move towards the 1.3000 area. Main support at 1.2680 area.       EUR/GBP – tested up to the 0.8570/80 area yesterday before slipping back. Still have support at the 0.8515/20 area and June lows. We also have resistance at the 50-day SMA which is now at 0.8630. Below 0.8500 targets 0.8460.     USD/JPY – continues to look soft falling below 142.00 with the risk of further losses towards the 139.80 area. Last weeks' weekly reversal suggests that a short-term top might be in. We need to see a move back above 142.80 to stabilise and argue for a return to 144.00.     FTSE100 is expected to open unchanged at 7,274     DAX is expected to open 45 points higher at 15,718     CAC40 is expected to open 18 points higher at 7,162

GBP: Pay data can keep the Bank of England hawkish for longer GBP/USD has risen to the highest levels since last April on the back of some strong UK wage data for May. As our UK economist James Smith notes, the upward surprise to UK wage growth is partly down to backward revisions. But that is not a huge comfort because looking at the private sector, which is what the Bank of England focuses on, we have seen another big month-on-month increase in pay. Whether that is partly because of the ongoing passthrough of the new National Living Wage (+10% in April), is not clear. But certainly, these are not figures the BoE will want to see and will maintain the market's exceptionally aggressive pricing of the Bank Rate up near 6.40% early next year. GBP/USD looks set to extend to 1.30 in this soft dollar environment, while EUR/GBP can retest the lows near 0.8520. 

US CPI set to fall to 3%, Bank of Canada to hike again? By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets saw another positive session yesterday, rising for the third day in a row in anticipation that China's efforts to support its property sector may translate into further measures to support a rebound in economic activity. The FTSE100 once again underperformed as the strong pound and weakness in pharmaceuticals acted as a drag.  US markets also closed higher on optimism that today's CPI report wouldn't spring any unpleasant surprises. This positive finish looks set to see markets here in Europe open slightly higher in a couple of hours' time. US inflation appears to be heading in the right direction, after sliding to a 2-year low last month of 4%, from 4.9% in April. A year ago, US CPI hit its peak at 9.1%. Core prices have continued to look sticky slipping back to 5.3% from 5.5%, however the continued hawkishness of the Federal Reserve has seen the slide in yields that came about because of these numbers, reverse sharply. With another rate rise due later this month this week's CPI numbers won't impact how the Federal Reserve is likely to act in 2 weeks' time, but the numbers might shine a light in whether we can expect another rate hike in September. June CPI is expected to slow further to 3.1% and core prices to slow to 5%. Having decided to signal a pause in their recent rate hiking cycle when they hiked rates in January, the Bank of Canada surprised markets in June by deciding to hike rates again, by 25bps to 4.75%. The decision followed a similar decision by the RBA days before on concerns that inflation was proving to be much stickier than feared. The Bank of Canada also tweaked its guidance about the need for further rate hikes giving them more flexibility when it comes to raising rates or choosing to hold them. Any decision could well be tempered by the current business outlook which in Q2 fell to its lowest levels since Q3 of 2020, although last week's June jobs report was strong, which could prompt the central bank to hike again by another 25bps to 5%. Core inflation did slow to 3.9% in May from 4.3% in April but remains elevated, and with the Fed likely to hike in two weeks' time it's quite likely the BoC will want to get out in front of them.  The Japanese yen has been one of the big movers in recent days on speculation that the Bank of Japan may start to look at tweaking its yield curve control policy, when it next meets at the end of the month.         EUR/USD – looks set for a move towards the recent range highs at 1.1100. Support at 1.0970 as well as last week's lows at 1.0830. Below 1.0820 targets 1.0780.     GBP/USD – continues to move higher as we look to extend to fresh 15-month highs, and the 1.3010/20 area. A move through 1.3020 signals potential for 1.3200. Main support at 1.2680 area.       EUR/GBP – sliding towards the 0.8500 area, with a break below potentially targeting 0.8460. Resistance remains back at the highs this week at the 0.8570/80 area. We also have resistance at the 50-day SMA which is now at 0.8620.     USD/JPY – slipped below the 50-day SMA at 140 which was the next support for the US dollar and could well extend towards the 138.50 area and cloud support. Last weeks' weekly reversal suggests that a short-term top might be in. We need to see a move back above 142.80 to stabilise and argue for a return to 144.00.   FTSE100 is expected to open 17 points higher at 7,299     DAX is expected to open 55 points higher at 15,845     CAC40 is expected to open at 35 points higher 7,235  

GBP: 1.30 will be tough for cable Sterling and UK interest rate markets did eventually respond to the higher wage data yesterday. Today, the Bank of England has just released its Financial Policy Summary and Record. Headlines suggest large banks have passed stress tests while smaller lenders and shadow banks remain a concern though UK households with high debt will remain below their peak of 2007. At first glance, there seems nothing here to urgently constrain the BoE's monetary tightening plans. US CPI will determine whether GBP/USD dramatically trades through 1.3000 - there is an outside risk to 1.33 should we see a November 22-style move in the dollar. But it is probably better to stay cautious here and after a good rally so far this month, 1.30 could be difficult to break. EUR/GBP has broken to a new low - but again 0.8500 might provide some psychological support.

GBP: Cable up, EUR/GBP sideways We are seeing a lot of correlation in short-dated yields around the world, where yesterday's soft US CPI data saw 22bp taken out of the Bank of England tightening cycle for early next year. The main takeaway from yesterday's Bank of England financial stability and subsequent communication appeared to be that consumers and businesses could withstand higher interest rates - were they to materialise. In addition, today's release of May UK GDP data has emerged marginally better than expected.  In some ways, sterling has already enjoyed its re-rating on the very hawkish BoE and thus may not outperform in this current dollar bear phase. However, many investors will now be targeting a move to 1.3300 in GBP/USD - assuming we can close the week above 1.30.  EUR/GBP has reversed off a low near 0.8500 - which now may mark the lower end of the trading range for this quarter

US dollar set to post its worst weekly decline since November By Michael Hewson (Chief Market Analyst at CMC Markets UK)   If we could sum up the catalyst behind this week's market price action, it can probably be summed up in a single word, disinflation.   Starting with Chinese inflation numbers on Monday, to US CPI on Wednesday, and US PPI on Thursday, all this week's inflation numbers have pointed to one overarching theme, that of rapidly slowing prices, which has had markets pricing in the prospect that this month's Federal Reserve rate hike is likely to be the last one for a while.     Unsurprisingly this has prompted a sharp decline in global yields, a big selloff in the US dollar, as well as giving equity markets a real boost in a complete reversal from the gloom of last week, with the Nasdaq 100 and S&P500 rising to their highest levels since January 2022.     European markets have also undergone a decent rebound on the basis that the multiple rate hikes that investors had been pricing in from the ECB and the Bank of England may now not happen. That doesn't mean we won't see these central banks hike again, it's still very likely that the ECB will hike by 25bps this month and the Bank of England at the start of August. It is what comes after that which has started to become a lot less clear.     UK GDP numbers for May, were encouraging, despite showing a contraction due to the extra Bank Holiday, coming in better than forecast with the pound managing to post another daily gain, putting in its best run of gains this year, and reinforcing its position as the best performing G10 currency this year.     Yesterday's UK data also showed that the services sector performed better than expected, coming in at 0%, showing that despite the challenges currently facing the economy it has continued to hold up reasonably well. This would suggest that the Bank of England still has room to push rates up further with 25bps already priced in for August and potentially 50bps if next week's CPI doesn't show a material slowing. Judging by the current trends around global inflation the feeling is that UK inflation could start to fall rapidly by the end of Q3.     The slide in the US dollar this week has been astonishing, and with the Federal Reserve set to go into a blackout period tomorrow, ahead of its next meeting, there has been little sign that this week's data has swayed the FOMC's stance when it comes to their view that further multiple rate hikes are likely to be needed between now and the end of the year. The problem now is the market isn't buying it, with 2-year yields retreating sharply, as markets price in a goldilocks scenario of slowing prices and a resilient labour market.         Today's only economic numbers of note are US import and export prices for June, which are expected to reinforce the deflationary narrative of this week's data, with both month on month and annual numbers all expected to come in negative for the second month in succession.   We'll also be getting the latest University of Michigan sentiment numbers for July, which have up until recently been market movers when it comes to forward inflation expectations. After this week's CPI and PPI numbers they probably won't get the same level of attention.   On the earnings front the focus will be on the release of the Q2 numbers for JPMorgan Chase, Citigroup and Wells Fargo, and their respective views of the health of the US consumer, and how much they set plan to aside in additional provisions. Their guidance on how they see the US economy in Q3 is also likely to be crucial.     EUR/USD – surged through this year's previous peaks, and rising to its highest level since February 2022, the euro looks on course to test the 1.1500 area and the 2022 highs. The 1.1100 area should now act as support.     GBP/USD – having broken above the 1.3020 area, the pound should now head towards the 1.3300 area and March 2022 highs. Support remains a long way back at the 1.3020 area, and below that at 1.2850.        EUR/GBP – failed at the 0.8570/80 area yesterday as it continues to ping between this area of resistance and the lows this week at 0.8500/10.     USD/JPY – looks set to push lower as we move into the cloud support area with next support at the 200-day SMA at 137.20, and below that at 135.70. Resistance now comes in at the 140.20 area and 50-day SMA.     FTSE100 is expected to open 12 points lower at 7,428     DAX is expected to open 15 points lower at 16,126     CAC40 is expected to open 7 points lower at 7,362  

EUR/GBP: 0.8500 could be the new floor   Frustratingly high UK CPI and wage data has kept the market pricing aggressive BoE rate hikes. At some point, as in the US, price data will begin to soften and see the market scale back the amount of BoE tightening expected into 2024. That is why we are still looking for EUR/GBP to trade higher later this year. For the time being, however, we look for a 25bp BoE hike on 3 August – with the June CPI release on 19 July being a big determinant of whether the BoE hikes 25bp or 50bp. We find it hard to expect sterling losses on the back of hard-landing fears and expect it will more be the re-assessment of the BoE cycle which will lift EUR/GBP off its lows.  

GBP: Softer into the CPI risk event The pound has continued to show more vulnerability than most of its G10 peers at the start of this week. EUR/GBP has crept higher in the past few sessions, back to the 0.8600 gauge as volatility in global central bank tightening expectations after the US CPI slowdown seems to have asymmetrically hit those curves that had more room for a dovish repricing, like the GBP one. We are also observing some positioning ahead of tomorrow’s key release of the UK inflation numbers. As discussed by our colleague James Smith here, CPI data will make or break a 50bp August rate hike by the Bank of England. Markets continue to lean on the hawkish side with their pricing: 44bp for August, 116bp in total. Still, peak rate expectations have remained volatile and were scaled back by nearly 15bp yesterday. Today, the UK calendar is empty. We suspect EUR/GBP can remain broadly supported into tomorrow’s CPI.

GBP: Good news on inflation, bad news for the pound Lately, we have been pointing at the pound’s vulnerable position. Markets' aggressive tightening expectations required data to offer no hints of abating price pressures and an overstretched positioning (on the long-end). It appeared that some long positions had been scaled back already ahead of this morning’s key CPI release, with the pound underperforming in the G10 space yesterday. Looking at the June figures released this morning, there is finally some encouraging news for the Bank of England. Headline inflation slid back below 7.9% (below consensus), illustrating a 0.4% MoM increase which has been the slowest seen since early 2022. We know that the BoE is mostly focused on service inflation, and there was good news here too – a decline from 7.4% to 7.2%, contrary to the BoE’s expectations. The question now is whether this is enough to tilt the balance to a 25bp hike in August. We are inclined to think so, even though it remains a close call. The post-CPI Sonia curve looks significantly changed, with 36bp priced in for August and 90bp to the peak, which marks a huge 55bp shift since last week. In FX, the pound is under pressure, down around 0.70% against the dollar. We suspect there is more room to fall in GBP/USD, especially if our expectations for some dollar support into the FOMC prove to be correct. A move to the 1.2800 area in Cable looks possible even before the BoE meeting. EUR/GBP has spiked, but we suspect markets may like some bullish narrative on the euro side beyond the 0.8700 level, and that may not come just yet if the ECB turns fully data-dependent and the eurozone outlook remains lacklustre at best.

GBP: Strong June retail sales provide a brief lift Sterling is rallying this morning on the back of strong UK retail sales data for June. Unseasonably warm weather for the UK last month was seen to be behind the bounce. The data will also feed into the Bank of England's narrative that the consumer can handle higher interest rates. The release has triggered a 20 pip drop in EUR/GBP. However, we think EUR/GBP probably put in an important low near 0.8500 earlier this month and that corporates will now use any EUR/GBP dip below 0.8600 to increase hedges on sterling receivables.  As an aside, reports are suggesting that Prime Minister Rishi Sunak will be opting for a UK general election in November 2024, i.e. as late as possible to allow more chance for the UK economy to recover.

GBP: BoE re-pricing might have come far enough for the time being Sterling has been under pressure over the last week on the back of the re-pricing of the Bank of England (BoE) rate cycle. Here, expectations for the Bank Rate at the end of this year have dropped from a 6.35% peak to now 'just' 5.88%. Given the lack of top-tier UK data this week and what could be a slightly hawkish Fed meeting on Wednesday, it may well be that the repricing of the BoE rate cycle and sterling softness have come far enough for the time being. This could see EUR/GBP correct back towards the 0.8600 area. GBP/USD could correct to the 1.2670/2700 area this week if the dollar correction does run a little further on the Fed story.

Fed set to raise rates to a 22 year high   European markets have seen a cautiously positive start to the week, buoyed by hopes of further stimulus measures from Chinese authorities in the wake of recent poor economic data. The FTSE100 has been a key beneficiary of this, putting in a two-month high yesterday.   The modest improvement in sentiment has also been helped in some part by the recent retreat in short term yields which is being driven by the hope that central banks won't have to hike rates as aggressively as thought a few weeks ago. Both German and UK 2-year yields have fallen sharply from their highs this month on this basis, helped by inflation which appears to be slowing more quickly than expected.     US markets have also put together a strong run of gains with the Dow and S&P500 hitting their highest levels since April 2022, on the back of optimism that the start of this week's earnings numbers will live up to the high expectations place on them.   Last night's initial reaction to the numbers from Microsoft, and Google owner Alphabet would suggest that optimism might be justified against a backdrop of a still resilient US economy, and a Federal Reserve that looks set to be close to the end of its rate hiking cycle.           Today's expected 25bps Fed rate hike, after last month's pause, looks set to be the last rate rise this year, whatever Fed policymakers would have you believe.   We may hear officials try and make the case for at least one more between now and the end of the year but given recent trends around US inflation its quite likely that PPI will go negative in July.   While Powell will try and make the case for further rate hikes, his time would be better spent in making the case for rates remaining higher for longer, and projecting when the FOMC expected the 2% target to be met. Core prices remain too high even with headline CPI at 3%, and it is here that the Fed will likely focus its and the market's attention.     If headline CPI continues to fall in the way, it has been doing the Fed will struggle to convince the markets that it would continue hiking rates against such a backdrop.   As things stand markets are already pricing in the prospect that this will be the last rate rise in the current hiking cycle given recent declines in the US dollar and US yields. With the next Fed meeting coming in September the market will have to absorb two more inflation reports and two more jobs' reports. Nonetheless the Fed will be keen to prevent the market pricing in rate cuts which was one of the key challenges earlier this year.   With inflation slowing and the jobs market resilient the US economy is currently in a bit of a goldilocks moment. This will be the challenge for Powell today, as he tries to steer the market into believing that the Fed could hike rates some more. We also shouldn't forget that we will get fresh messaging at the end of August at the Jackson Hole annual symposium.     EUR/USD – retreated from the 1.1275 area which is 61.8% retracement of the 1.2350/0.9535 down move, with the next key support at the 1.0980 level.  Currently have resistance at the 1.1120 area.   GBP/USD – appears to have found a base at 1.2795/00, breaking a run of 7 daily losses. While above the 50-day SMA the uptrend from the March lows remains intact with the next resistance at the 1.3020 area.     EUR/GBP – last week's failure at the 0.8700 area has seen the euro slip back, with the risk that we could revisit the recent lows at 0.8500/10.   USD/JPY – the rebound from the 200-day SMA at 137.20, appears to have run out of steam at the 142.00 area, however the bias remains for a move lower while below the recent highs of 145.00.   FTSE100 is expected to open 10 points lower at 7,681   DAX is expected to open 25 points higher at 16,236   CAC40 is expected to open 35 points lower at 7,380  

GBP: Sterling enjoys the travails of the euro Having traded as high as 0.87 last week on the back of the softer UK CPI data, EUR/GBP is now back at 0.8570. This is entirely a euro-driven move and does not represent some bullish re-appraisal of sterling's prospects. Indeed, the UK calendar looks very light until the Bank of England (BoE) rate meeting on August 3rd. Here, the market is now pricing 33bp of tightening in the policy rate, down sharply from the 50bp of tightening that was priced in mid-June. Given that we are mildly negative on the euro going into tomorrow's ECB meeting and that UK rates might be dragged higher by US rates later today, we would say EUR/GBP could have a little more downside to the 0.8520 area over the next couple of sessions.

ECB set to follow the Fed and raise rates by 25bps   European markets underwent a disappointing session yesterday, while US markets also underperformed after the Federal Reserve raised interest rates by 25bps as expected, pushing them to their highest level in over 20 years. At the ensuing press conference chairman Powell reiterated his comments from June, that additional rate rises will depend on incoming data.     In the statement it was restated that inflation remained elevated, and that the committee was highly attentive to the risks that prices might remain high. Powell was non-committal on whether the Fed would raise rates again in September, merely restating that if the data warranted the central bank would do so. US yields finished the day mixed, as did US stocks with little in the way of surprises from last night's meeting, as we look ahead to today's ECB rate meeting. If the Fed is close to the end of its rate hiking cycle which appears to be looking increasingly likely, despite Powell's determination to keep markets guessing, the pressure on the ECB to be more aggressive in its own battle against inflation, is also looking as if it might recede.     We've already seen the euro rise sharply against the US dollar in the last few weeks, which is deflationary and will help. Furthermore, factory gate prices in German and Italy have been in freefall for months now, so while core CPI has remained sticky and close to record highs at 5.5%, it's also important to remember that the ECB has pushed rates from 2% to 4% this year already.     We expect to see another 25bps later today, however the consensus that was so prevalent at the start of this year of more aggressive rate hikes is already starting to fray on the governing council, with Stournaras of the Bank of Greece pushing back strongly against the idea of more aggressive action.     He hasn't been the only one however, and we've also started to see more vocal political opposition to further tightening from Italian Prime Minister Giorgia Meloni who has been publicly critical of the ECB when it comes to recent rate hikes. If, as expected last nights Fed hike is the last one then it is entirely feasible that the ECB could similarly be close to the end of its own rate hiking cycle.     EUR/USD – we've seen a modest rebound from levels just above the 1.1000 level, having retreated from the 1.1275 area which is 61.8% retracement of the 1.2350/0.9535 down move.  A break below 1.0980 could see a move towards 1.0850. Currently have resistance at the 1.1120 area.     GBP/USD – continues to pull away from the recent lows at 1.2795/00, having broken a run of 7 daily losses. While above the 50-day SMA the uptrend from the March lows remains intact with the next resistance at the 1.3020 area.         EUR/GBP – continues to look soft with support remaining at the recent lows at 0.8500/10. Resistance currently at the 0.8600 and the highs last week at 0.8700/10.     USD/JPY – continues to drift down away from the 142.00 area, with support at 139.70. A move below 139.50 opens up the risk of a move back towards the 200-day SMA at 137.20.     FTSE100 is expected to open 18 points higher at 7,695     DAX is expected to open 52 points higher at 16,183 CAC40 is expected to open 35 points higher at 7,350

Yen moves higher as Bank of Japan tweaks YCC By Michael Hewson (Chief Market Analyst at CMC Markets UK) European markets saw a strong session yesterday, buoyed by the belief that the central banks could be done when it comes to further rate hikes, after the ECB followed the Fed by raising rates by 25bps and then suggesting that a pause might be on the table when they next meet in September. The mood was also helped by a strong set of US economic numbers which pointed to a goldilocks scenario for the US economy.     US markets also opened strongly with the S&P500 pushing above the 4,600 level and its highest level since March 2022, before retreating and closing sharply lower, with the Dow closing lower, breaking a run of 13 days of gains. Sentiment abruptly changed during the US session on reports that the Bank of Japan might look at a possible "tweak" to its yield curve control policy at its latest policy meeting earlier this morning.     This report, coming only hours before today's scheduled meeting, caught markets on the hop somewhat pushing the Japanese yen higher against the US dollar, while pushing US 10-year yields back above 4%. With Japanese core inflation above 4% there was always the possibility that the Bank of Japan might spring a surprise, or at least lay the groundwork for a possible tweak. The Bank of Japan has form for when it comes to wrong footing the market, and so it has proved, as at today's meeting they announced that they would allow the upper limit on the 10-year yield to move from 0.5% to 1%. They would do this by offering to purchase JGBs at 1% every day through fixed rate operations, effectively raising the current cap by 50bps, and sending the yen sharply higher. The central bank also raised its 2023 inflation forecast to 2.5% from 1.8%, while nudging its 2024 forecast lower to 1.9%.     As far as today's price action is concerned, the late decline in the US looks set to translate into a weaker European open, even though confidence is growing that the Fed is more or less done when it comes to its rate hiking cycle. Nonetheless, investors will be looking for further evidence of this with the latest core PCE deflator, as well as personal spending and income data for June, later this afternoon to support the idea of weaker inflation. Anything other than a PCE Core Deflator slowdown to 4.2% from 4.6%, could keep the prospect of a 25bps September hike on the table for a few weeks more. Both personal spending and income data are expected to improve to 0.4% and 0.5% respectively.     We're also expecting a tidal wave of European GDP and inflation numbers, which are expected to confirm a weaker economic performance than was the case in Q1, starting with France Q2 GDP which is expected to slow to 0.1% from 0.2%. The Spanish economy is also expected to slow from 0.6% to 0.4% in Q2. On the inflation front we'll be getting an early look at the latest inflation numbers for June from France and Germany as well as PPI numbers for Italy. France flash CPI for June is expected to slow to 5.1% from 5.3%, while Germany CPI is expected to slow to 6.6% from 6.8%. With PPI inflation acting as a leading indicator for weaker inflation for all of this year the latest Italy PPI numbers will be scrutinised for further weakness in the wake of a decline of -3.1% in May on a month-on-month basis and a -6.8% decline on a year-on-year basis.       EUR/USD – failed to follow through above the 1.1120 area, subsequently slipping back, falling below the 1.1000 area, which could see a retest of the 1.0850 area which is the lows of the last 2 weeks. Below 1.0850 targets a move back to the June lows at 1.0660.   GBP/USD – slipped back from the 1.3000 area, falling back below the Monday lows with the risk we could retest the 50-day SMA and trend line support at the 1.2710. While above this key support the uptrend from the March lows remains intact.       EUR/GBP – struggling to rally, with resistance at the 0.8600 area, and support at the recent lows at 0.8500/10. Above the 0.8600 area targets the highs last week at 0.8700/10.   USD/JPY – while below the 142.00 area, the bias remains for a move lower, with the move below 139.70 targeting a potential move towards the 200-day SMA at 137.20.   FTSE100 is expected to open 24 points lower at 7,668   DAX is expected to open 38 points lower at 16,368   CAC40 is expected to open 20 points lower at 7,445

EU inflation set to slow further in July Last week saw another positive week for markets in Europe, the third in a row with the FTSE100 pushing up to a 2-month high before slipping back, while the DAX managed to close at a new record high, despite the German economy stagnating in Q2.     With price pressures in Germany and the US showing signs of slowing more than expected in the last couple of months there is a sense that last week's rate hikes by the Federal Reserve and the ECB may well have been their last. We've heard several ECB policymakers expressing increasing caution over the growth outlook, which appears to be tempering enthusiasm for more aggressive rate action, while some US policymakers are becoming more optimistic about the glide path for inflation, with Minneapolis Fed President Neel Kashkari commenting at the weekend that the US could avoid a recession, although he was careful not to sound too dovish.   For now, stock markets appear to be buying into a soft-landing narrative when it comes to the US economy, with US markets closing higher for the 3rd week in a row with the Dow, S&P500 and Nasdaq 100 all posting their highest weekly closes since January 2022.     As we come to the end of another positive month for both US and European markets there is still little sign of the sharp move lower that many have been expecting over the last few months. This so-called "wall of worry" that has characterised most of the gains since the big March sell-off has thus far shown little sign of coming to end, despite bond yields which have as yet remained close to their highest levels since 2007. Even Friday's move by the Bank of Japan in tweaking its yield curve control policy failed to have a lasting impact, with the yen finishing the day lower, after losing ground initially, although yields on JGB's did hit their highest levels in 9 years. The US dollar also had another positive week rallying for the 2nd week in a row, benefitting largely due to the US economy's ability to withstand the higher rates that have been pushed through by the Federal Reserve over the last 16 months.   With the ECB indicating that a "pause" might be coming when the governing council next meets in September, today's latest flash EU CPI for July could go further in reinforcing that narrative after Friday's slowdown in German inflation. Headline CPI is expected to slow to 5.3% from 5.5%, while core prices are forecast to slow to 5.4%.     On the growth front EU Q2 GDP is expected to move back into positive territory to 0.2%, after two negative quarters. It's also a big week for the pound with Thursday's Bank of England rate meeting, where we can expect to see another rate hike of 25bps at the very least, with an outside chance of a 50bps move. Markets are still expecting a much higher terminal rate for the BOE, well above the current 5%, although it is now well off the peaks of a few weeks ago when it was well above 6%. Even at current estimates of just below 6%, it still seems way too high.   Much could depend on the strength of today's consumer credit and mortgage lending data for June which is expected to show further weakness. Mortgage approvals are expected to slip back below 50k to 49k, while net consumer credit is forecast to remain steady at £1.1bn. Given current levels of wage growth a hold from the Bank of England is unlikely, even if many people think they should pause. If the Bank of England is sensible this week, they will temper any reaction to over-react and we will probably see a hawkish hike of 25bps, given the uncertainty ahead of the July CPI numbers which are due 16th August. Current expectations are for a sharp slowdown which in turn could future rate expectations fall further.     This week also has the July Friday's US payrolls report to look forward to along with a whole host of US labour market data with the ADP report also in focus after June's bumper 497k number, as well as June JOLTs job openings.        EUR/USD – found support at the 1.0940 area last week with further support at the 50-day SMA as well as the 1.0850 area. Resistance currently at last week's high at 1.1150. GBP/USD – slipped back from the 1.3000 area, last week with next support at trend line support at 1.2710, and the 50-day SMA at 1.2700. While above this key support the uptrend from the March lows remains intact.     EUR/GBP – struggling to rally, finding resistance at the 0.8600 area, with the risk of a return to the recent lows at 0.8500/10. Above the 0.8600 area targets the July highs at 0.8700/10. USD/JPY – Friday's rebound from the 138.00 area and cloud support could extend back towards the 142.00 area. While below the bias remains for a move lower, however a move back through 142.20 could trigger a move back to the 145.00 area. FTSE100 is expected to open 30 points lower at 7,664 DAX is expected to open 32 points lower at 16,437 CAC40 is expected to open 14 points lower at 7,462  

Manufacturing PMIs in focus, as RBA keeps rates unchanged     European markets finished the month of July on a rather subdued note, even allowing for another month of solid gains, although we did see another new record high for the DAX, while the CAC 40 posted a record monthly close. The euro Stoxx 50 also posted its highest monthly finish since October 2007. Both the FTSE100 and FTSE250 also fared reasonably well, with the FTSE100 closing at a 2-month high, helped by a rebound in house builders on the back of easing interest rate rise expectations. US markets also started the final day of July on the front foot before slipping back from their intraday highs, on the back of some end of month profit taking, drawing a line under a 5th successive month of gains. While there is a growing degree of confidence that last week's rate hikes from the Federal Reserve and the European Central Bank might be the prelude to a lengthy pause, there is rising realisation that rates may well have to stay at current levels for quite a while yet.     Nonetheless, despite this apprehension Asia markets have seen a positive session, despite weaker Chinese PMI numbers and this looks set to translate into a modestly positive start for markets in Europe this morning. This week we can expect the Bank of England to follow suit with another rate hike of its own, while this morning the RBA took the decision to keep rates unchanged at 4.1%. The decision was finely balanced with many expecting a rate hike, however the Australian central bank appears to have erred on the side of caution, given last week's weaker than expected Q2 CPI reading, and the weakness in recent PMI numbers.     The RBA went on to alter their inflation forecast to predict that prices would return to target in late 2025, while also revising up their GDP growth targets for this year and next year. The central bank did keep the door open to further hikes in the future. The Australian dollar slid back giving up some of the gains it made yesterday, while the ASX200 pushed back up towards its recent highs.     Today's economic agenda shifts the focus back to the weakness of the manufacturing sector, as well as the resilience of the US labour market, as we look to a flat open. In Germany especially, the performance of the manufacturing sector has been dire with July manufacturing PMI expected to be confirmed at 38.8, the lowest level since the manufacturing sector was shut down due to Covid. In France, manufacturing PMI is expected to slow to 44.5, while only modest improvements are expected in Spain and Italy of 48.3 and 44.3. The UK manufacturing numbers are expected to slow to 45, from 46.5.     Even the US economy hasn't managed to escape the manufacturing slump with the latest ISM manufacturing survey for July expected to show a modest improvement from 46 to 46.9, with prices paid expected to see a modest improvement to 44, from 41.8. It is clear that the manufacturing sector is experiencing a clear deflationary impulse which is likely to continue to act as a drag on prices in the coming months. The bigger question is whether this translates into a similar drag on the services sector, and here prices are proving to be slightly stickier.     One major concern to the slowing prices narrative has been the recent gains in oil prices, which yesterday saw their biggest monthly gain in over a year, over concerns that Saudi Arabia will go further and extend their production cuts into September. This rise in prices over the last 4 weeks is already feeding into higher prices at the fuel pumps, which if sustained could impact on consumer demand in the coming weeks.      We also get an insight into the US labour market with the latest JOLTS job openings numbers for June which are expected to show a fall from 9.82m vacancies to 9.6m, which would be a 2-year low. While such a move would be welcome it's also important to remember that vacancies are still over 2m higher than they were at their pre-pandemic peaks, back in mid-2018. This number needs to come down a lot further before we can infer that the falls in vacancies might lead to a moderation in wage growth.     EUR/USD – currently have support at the 1.0940 lows from last week with further support at the 50-day SMA as well as the 1.0850 area. Resistance currently at last week's high at 1.1150.     GBP/USD – support currently at the 1.2750 area as well as trend line support from the March lows at 1.2710, and the 50-day SMA at 1.2700. While above this key support the uptrend from the March lows remains intact. Resistance at the 1.3000 area.         EUR/GBP – currently range trading between resistance at the 0.8600 area, with the risk of a return to the recent lows at 0.8500/10. Above the 0.8600 area targets the July highs at 0.8700/10.     USD/JPY – broken above the 142.00 area, opening up the risk of a move back to the previous peaks at 145.00. We need to see a move back above 142.60 for this to unfold. Support comes in at yesterday's lows at 140.70.     FTSE100 is expected to open 3 points higher at 7,702     DAX is expected to open 13 points higher at 16,459     CAC40 is expected to open 5 points higher at 7,502     By Michael Hewson (Chief Market Analyst at CMC Markets UK)

European markets set to open lower after US rating downgrade     We saw a negative start to August for European markets with the DAX leading the way lower, having only put in a new record high the day before, after poor manufacturing PMIs and disappointing earnings prompted profit taking.   Yesterday's weakness appears to have been prompted by concern that the economy is a little bit weaker than perhaps people would like, raising concern for earnings growth heading into the second half of the year. US markets also finished the day lower, although closing well off the lows of the day with the Dow managing to eke out a gain. US yields also finished the day higher, on the rising realisation that rates may well have to stay at current levels for quite a while yet.     This profit taking has continued overnight after Fitch downgraded the US credit rating to AA+ from AAA, while simultaneously boosting demand for haven assets, with Asia markets falling sharply, and which looks set to translate into a sharply lower European open.   The increase in crude oil prices over the past 4 weeks is also raising concern that the falls in input prices that we've seen over the last few months might start to hit a floor and start rising again. Yesterday we got another snapshot of the US labour market as US job openings (JOLTS) fell to their lowest levels since April 2021, although they are still well above the levels, they were pre-pandemic. The latest employment component in the July ISM manufacturing survey also slowed to its lowest level since July 2020.     Today we get the latest insight into private sector hiring with the ADP employment report for July which is unlikely to repeat the bumper 497k seen in the June numbers. We should also be prepared for a downward revision to that report with July expected to see a more moderate 190k, as we look towards Friday's more important non-farm payrolls numbers. While stocks slipped back yesterday the US dollar rose to a 3-week high, gaining ground across the board on the grounds of the broader resilience of the US economy.     EUR/USD – still finding support at the 1.0940 lows from last week with further support at the 50-day SMA as well as the 1.0850 area. Resistance currently at last week's high at 1.1150.     GBP/USD – has continued to slide lower towards trend line support from the March lows at 1.2710, and the 50-day SMA at 1.2700. While above this key support the uptrend from the March lows remains intact. Resistance at the 1.3000 area.         EUR/GBP – popped briefly above the resistance at the 0.8600 area, before slipping back again, with the risk of a return to the recent lows at 0.8500/10. We need to see a concerted move above 0.8620 to target the July highs at 0.8700/10.     USD/JPY – continues to move through the 142.00 area, with the next target at the previous peaks at 145.00. Support comes in at this week's lows at 140.70.     FTSE100 is expected to open 30 points lower at 7,636     DAX is expected to open 88 points lower at 16,152     CAC40 is expected to open 36 points lower at 7,370   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  

European markets set to open lower after US rating downgrade     We saw a negative start to August for European markets with the DAX leading the way lower, having only put in a new record high the day before, after poor manufacturing PMIs and disappointing earnings prompted profit taking.   Yesterday's weakness appears to have been prompted by concern that the economy is a little bit weaker than perhaps people would like, raising concern for earnings growth heading into the second half of the year. US markets also finished the day lower, although closing well off the lows of the day with the Dow managing to eke out a gain. US yields also finished the day higher, on the rising realisation that rates may well have to stay at current levels for quite a while yet.     This profit taking has continued overnight after Fitch downgraded the US credit rating to AA+ from AAA, while simultaneously boosting demand for haven assets, with Asia markets falling sharply, and which looks set to translate into a sharply lower European open.   The increase in crude oil prices over the past 4 weeks is also raising concern that the falls in input prices that we've seen over the last few months might start to hit a floor and start rising again. Yesterday we got another snapshot of the US labour market as US job openings (JOLTS) fell to their lowest levels since April 2021, although they are still well above the levels, they were pre-pandemic. The latest employment component in the July ISM manufacturing survey also slowed to its lowest level since July 2020.     Today we get the latest insight into private sector hiring with the ADP employment report for July which is unlikely to repeat the bumper 497k seen in the June numbers. We should also be prepared for a downward revision to that report with July expected to see a more moderate 190k, as we look towards Friday's more important non-farm payrolls numbers. While stocks slipped back yesterday the US dollar rose to a 3-week high, gaining ground across the board on the grounds of the broader resilience of the US economy.     EUR/USD – still finding support at the 1.0940 lows from last week with further support at the 50-day SMA as well as the 1.0850 area. Resistance currently at last week's high at 1.1150.     GBP/USD – has continued to slide lower towards trend line support from the March lows at 1.2710, and the 50-day SMA at 1.2700. While above this key support the uptrend from the March lows remains intact. Resistance at the 1.3000 area.         EUR/GBP – popped briefly above the resistance at the 0.8600 area, before slipping back again, with the risk of a return to the recent lows at 0.8500/10. We need to see a concerted move above 0.8620 to target the July highs at 0.8700/10.     USD/JPY – continues to move through the 142.00 area, with the next target at the previous peaks at 145.00. Support comes in at this week's lows at 140.70.     FTSE100 is expected to open 30 points lower at 7,636     DAX is expected to open 88 points lower at 16,152     CAC40 is expected to open 36 points lower at 7,370   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  

Bank of England set to raises rates to a new 15 year high European markets underwent another negative session yesterday, clobbered by concerns over weaker than expected economic activity, which in turn is raising concern for earnings growth heading into the second half of the year. Throw in a US credit rating downgrade from Fitch and the catalyst for further profit taking after recent record highs for the DAX completed the circle of negativity.     US markets also underwent a negative session, with the Nasdaq 100 undergoing its worst session since February, while the US dollar acted as a haven and the yield curve steepened. As a result of the continued sell-off in the US, and weakness in Asia markets, European markets look set to open lower later today, and while the Fitch downgrade doesn't tell us anything about the US political governance that we don't already know investors appear to be looking to test the extent of the downside in the market.     Earlier this week we saw some poor manufacturing PMI numbers which showed that the European economy was very much in recession, with disinflation very much front and centre. This has raised questions as to whether the services sector will eventually succumb to similar weakness. There has been some evidence of that in recent readings but by and large services activity has been reasonably robust. In Spain services activity is expected to remain steady at 53.4, along with Italy at 52.2. The recent flash numbers from France saw further weakness to 47.4, while in Germany we can expect to see a resilient 52, down from 54.1.         EU PPI for June is expected to slip further into deflation to -3.2% year on year. In the UK services activity is expected to slow to 51.5 from 53.7. With inflation unexpectedly slowing more than expected in June to 7.9% it could be argued that the pressure on the Bank of England to hike by another 50bps has eased somewhat, especially since the Fed and the ECB both hiked by 25bps last week.     Having seen core CPI slow by more than expected to 6.9% forward rate expectations have eased quite markedly in the past few weeks. Forward market expectations of where the terminal rate is likely to be, have slipped from 6.5%, to below 6%. It's also likely that inflation for July will slow even more markedly as the effects of the energy price cap get adjusted lower which might suggest there is an argument that we might be close to the end of the current rate hiking cycle.     The fly in the ointment for the Bank of England is the rather thorny issue of wage growth which has moved above core CPI, and could prompt the MPC to err towards the hawkish side of monetary policy and raise rates by 50bps, with a view to suggesting that this could signal a pause over the coming weeks as the central bank gets set to consider how quickly inflation falls back over the course of Q3. Such an aggressive move would be a mistake given that a lot of the pass-through effects of previous rate increases haven't fully filtered down with some suggesting that the Bank of England should pause. In the current environment this seems unlikely given a 25bps is priced in already.       In a nutshell we can expect to see a hawkish 25bps as a bare minimum, and we could also see a split with some pushing for 50bps. We could also get an insight into how new MPC member Megan Greene views the current situation when it comes to casting her vote. One thing seems certain, she is unlikely to be dovish as Tenreyro whom she replaced on the MPC.     We'll also get a further insight into the US labour market after another bumper ADP payrolls report yesterday which saw another 324k jobs added in July. Weekly jobless claims are expected to come in at 225k, while we'll also get an insight into the services sector with the ISM services index for July which is expected to come in at 53. The employment component will be of particular interest, coming in at 53.1 in June, having jumped from 49.2 in May.       EUR/USD – managed to hold above the 50-day SMA for the time being, with a break below targeting further losses towards 1.0830. Resistance currently at last week's high at 1.1150.     GBP/USD – also flirting with the 50-day SMA with a clean break targeting a move towards the 1.2600 area.  Resistance at the 1.2830 area as well as 1.3000.         EUR/GBP – continues to edge higher drifting up to the 0.8630 level before slipping back, although it is now finding some support at the 0.8580 area. We need to see a concerted move above 0.8620 to target the July highs at 0.8700/10.     USD/JPY – continues to look well supported above the 142.00 area, with the next target at the previous peaks at 145.00. Support comes in at this week's lows at 140.70.     FTSE100 is expected to open 10 points lower at 7,551     DAX is expected to open 22 points lower at 15,998     CAC40 is expected to open 15 points lower at 7,297   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  

GBP: Some downside risks to sterling The Bank of England announces its interest rate decision and releases a new Monetary Policy Report (MPR) at 1300CET today. Most analysts expect a 25bp hike in the Bank Rate to 5.25%, but a significant minority are looking for a 50bp rate hike. Money markets price around 32bp of tightening today. Despite the welcome UK June CPI figures, no one expects the BoE to let its guard down on inflation and its statement will likely retain words to the effect that rates could be raised further were there evidence of more persistent price pressures in the economy. The market will also be looking out for the CPI forecasts in the monetary policy report and also whether the BoE has anything to say about Quantitative Tightening (QT), currently running at a pace of £80bn per annum. Some are arguing that QT could be accelerated to well over £100bn p.a. A slightly risk-off environment and our baseline call of the BoE only hiking 25bp could be a mild negative for sterling – especially were the BoE to go further than the Fed in acknowledging the process of disinflation. For cable that means an outside risk of a drop to the 1.2580/2600 area (depending on the dollar environment), while EUR/GBP could be correcting back to the 0.8640 area.

Bank of England opts for smaller rate hike after better inflation news The Bank of England is keeping all its options open on future rate hikes, although another rise in September seems highly likely. Whether that's repeated in November is a more open question, particularly if services inflation starts to fall more noticeably between now an.   Bank of England reverts back to a 25bp hike Better news on inflation has, as expected, enabled the Bank of England to pivot back to a 25 basis-point rate hike this month. That follows a more aggressive 50bp hike back in June. Policymakers clearly don’t want to come across as complacent though, and there are plenty of references to the upside risks associated with inflation, as well as the recent surprises in wage growth. We shouldn’t be too surprised then that the Bank isn’t offering up much on what it intends to do next. The BoE retained its forward guidance that says it could hike again if “evidence of more persistent pressures” shows up in the inflation figures. This is the same phrase it has used all year and is sufficiently vague to keep various options on the table for September and beyond. That said, there are a few hints that we might be nearing the top for policy rates. Interestingly, the Bank now formally says that policy is restrictive, which seems to be a new addition to the statement – as is the line about policy needing to stay “sufficiently restrictive for sufficiently long”. At a pinch, you could argue this is the Bank laying very early groundwork for a pause later in the year, though we’re at risk of overanalysing. Meanwhile the new forecasts, even accounting for the Bank’s upside skew that it applies to what its models are churning out, show inflation at (or even a tad below) target in a couple of years’ time. Curiously, that’s also the case under the assumption that Bank Rate stays unchanged at its new level over the coming months. That said, the Bank’s forecasts have been pointing to sub-target inflation for some time now, and policymakers don’t appear to be putting a lot of faith in what their models are currently predicting.   So what next? Another hike in September seems likely, but by November we think the news on services inflation and wage growth should be looking a little better. The former has risen in no small part because of higher energy bills, and, according to ONS surveys, the pressure on service sector companies to aggressively raise prices is abating. Whether or not we get another 25bp hike in November will therefore largely depend on whether services inflation has failed to slow, but our base case for now is that 5.50% in September will mark the peak for Bank Rate. Market pricing of a peak at 5.65% around the turn of the year therefore seems fair – and certainly much more reasonable than it did just a few weeks ago when investors briefly saw peak Bank Rate near 6.5%.   UK markets read the statement on the less hawkish side Today’s MPC statement and accompanying material have seen sterling sell-off around 0.5% and the UK 2-10 year Gilt curve steepen by around 7-8bps, led by declining yields at the short end of the curve. As above, investors seem to have read something in either the statement or the CPI forecasts suggesting that the Bank Rate may not need to be hiked as high as 5.75% after all. As discussed in our BoE preview, we expect the general direction of travel for EUR/GBP to lie towards the 0.88 area later this year as evidence builds that rates may in fact peak at 5.50%. We still like a higher GBP/USD on the back of the softer dollar story – but that does rely on both US inflation and activity showing a marked deceleration over the coming months. We currently see GBP/USD ending the year just above 1.30. Gilt price action today comes amid unsettled conditions at the long end of the US Treasury market.  A steeper curve does seem to make the most sense, if investors do continue to question whether the Bank Rate makes it to 5.75% and also while the US fiscal situation, plus rising Japanese government bond yields, keep the long end of core bond markets under pressure. Currently, we have a year-end 10-year Gilt target of 3.80% – but that requires a lot of things to go right.

Late Friday US sell-off set to weigh on European open    By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets managed to eke out some modest gains on Friday, at the end of what was a negative week overall as concerns over earnings guidance downgrades and rising long term yields weighed on broader market sentiment. A mixed US jobs report looked to have stabilised sentiment, pulling the DAX and FTSE100 off their lows of the week after another slowdown in jobs growth in July and downward revisions to previous months, spoke to the idea that central bank rate hikes have done their job, and that no more are coming. This uplift only lasted until just after European markets had closed with all the signs that US markets would be able to end a 3-day losing streak, however the early gains that we saw in the early part of the day soon evaporated with the Nasdaq 100 and S&P500 both posting their worst weekly performances since March.     In essence there was something for everyone in Friday's jobs report, weaker jobs growth, the unemployment rate inching lower, and robust wage growth. Ultimately it spoke to a resilient US economy, as well as a possible Fed pause in September, ahead of this week's CPI report, although there are some on the FOMC who are still on the "more rate hikes to come" line. One of these members is Governor Michelle Bowman who at the weekend expressed her view that more rate hikes were likely to be needed to return inflation to target. While this may now be starting to become a minority view on the FOMC, it merely serves to highlight the growing uncertainty that is not only starting to permeate central bank thinking but also investor sentiment more broadly, as well as raising broader questions. Has the Fed managed to engineer a soft landing, and should they cause a pause to allow more time to assess any lag effects on consumers as well as the broader economy. Or do they carry on hiking on the basis that we could have seen a short-term base when it comes to prices slowing down? While markets are still pricing in a 40% chance of one more rate hike before the end of the year, this figure could swing either way in the event of a hot CPI print later this week. If next month's jobs report is of a similar "goldilocks" variety then a pause seems the most likely outcome from the next Fed rate decision. Whichever way we go with the data in the coming weeks, a pause still seems the most plausible outcome. For the most part bond markets drove most of the price action in financial markets last week with sharp increases in longer term yields, despite the sharp falls on Friday, as the yield curve steepened sharply. Yields could be the main driver this week with the US set to issue $103bn across a range of maturities this week, in the wake of last week's credit rating downgrade by Fitch.   It's also worth keeping an eye on this week's China trade data for July, due tomorrow, and inflation date on Wednesday, against a backdrop of an economy that appears to be struggling with weak domestic demand, and where economic activity has been struggling. We also have preliminary Q2 GDP economic numbers for the UK at the end of the week as well as industrial and manufacturing production numbers for June.       EUR/USD – rallying off last week's lows just above the 1.0900 area, closing above the 50-day SMA in the process we need to see a move back above 1.1050 to have any chance of revisiting the July peaks at 1.1150.   GBP/USD – drifted down the 1.2620 area last week before rebounding strongly, but we need to see a back above the 1.2800 area to ensure this rally has legs. Below 1.2600 targets 1.2400. Resistance at the 1.2830 area as well as 1.3000.     EUR/GBP – feels like it wants to retest the 100-day SMA at 0.8680, having drifted back from the 0.8655 area last week. Support now comes in at the 0.8580 area, with the bias for a retest of the July highs at 0.8700/10. Below 0.8580 retargets the 0.8530 area.   USD/JPY – failed just below the 144.00 area last week, and has now slid back below the 142.00 area, which brings a move towards the 140.70 area into focus. Main resistance remains at the previous peaks at 145.00.   FTSE100 is expected to open 31 points lower at 7,533   DAX is expected to open 54 points lower at 15,898   CAC40 is expected to open 29 points lower at 7,296

GBP: Sterling has not moved much since BoE The sterling trade-weighted index is only marginally weaker since the Bank of England 'only' hiked by 25bp last Thursday. Market interest rates are slightly lower, but investors have not given up pricing two further 25bp hikes by early next year. At present, we look for one more hike to 5.50% in the Bank Rate (probably at the September meeting) before the BoE is prepared to go into a formal pause. This all points to a range-bound sterling over the next couple of months, but we retain an upside bias in EUR/GBP into year-end. On the UK calendar, this week will be BoE Chief Economist, Huw Pill, speaking at 1815CET today and then not much data until Friday's release of 2Q GDP numbers. For Cable, we see 1.2590/2620 as important support and what should be the lower boundary of this week's range.

Europe set for lower open after strong US session, China trade disappoints   By Michael Hewson (Chief Market Analyst at CMC Markets UK)   It was a rather subdued start to the trading week in Europe yesterday with little in the way of positive drivers although we managed to hold on most of the rebound that we saw on Friday in the wake of the July jobs report out of the US. US markets on the other hand enjoyed a much more robust start to the week, ending a 4-day decline and reversing the losses of the previous two sessions, as bargain hunters returned.   The focus this week is on Thursday's inflation numbers from the US, which could show that prices edged up in July, however it is the numbers out of China tomorrow which might be more instructive in respect of longer-term trends for prices, if headline CPI follows the PPI numbers into deflation.       Earlier this morning the latest China trade numbers for July continued to point to weak economic activity and subdued domestic demand. The last 2 months of Q2 saw sharp declines in exports, with a -12.4% fall in June. There was little let-up in this morning's July numbers with a bigger than expected decline of -14.5%, the worst performance since February 2020, with global demand remaining weak. Imports have been little better, with negative numbers every month this year, and July has been no different with a decline of -12.4%, an even worse performance from June's -6.8%, with all sectors of the economy showing weakness. With numbers this poor it surely can't be too long before Chinese policymakers take further steps to support their economy with further easing measures, however, there appears to be some reluctance to do so at any scale for the moment, due to concerns over capital outflows.     Today's European market open was set to be a modestly positive one, until the release of the China trade numbers, however we now look set for a slightly lower open, with the only data of note the final German CPI numbers for July which are set to show that headline inflation slowed modestly to 6.5% from 6.8% in June.   It's also set to be another important week for the pound ahead of Q2 GDP numberswhich are due on Friday. Before that we got a decent insight into UK retail sales spending earlier this morning with the release of two important insights into consumer behaviour in July.   The BRC retail sales numbers for July showed that like for like sales slowed during the month, rising 1.8%, well below the 3-month average of 3.3%. Food sales performed particularly well, but at the expense of online sales of non-food items like clothes which showed a sharp slowdown.     It is clear that consumers are spending their money much more carefully and spending only when necessary, as Bank of England rate hikes continue to bite on incomes. With some consumers approaching a cliff edge as their fixed rate terms come up for expiry, they may well be saving more in order to mitigate the impact of an impending sharp rise in mortgage costs. That said in a separate survey from Barclaycard, spending on entertainment saw a big boost of 15.8% even as clothing sales declined.     Bars, pubs, and clubs saw a pickup in spending as did the entertainment sector as Taylor Swift did for July, what Beyonce did for May. The release of a big slate of summer films may also have offered a boost with the latest Indiana Jones film, along with Mission Impossible Dead Reckoning, Barbie and Oppenheimer prompting people to venture out given the wetter weather during the month.       EUR/USD – not much in the way of price action yesterday although the euro managed to hold onto most of the rally off last week's lows just above the 1.0900 area. We currently have resistance at the 1.1050 area which we need to break to have any chance of revisiting the July peaks at 1.1150.     GBP/USD – another solid day yesterday after the rebound off the 1.2620 area last week. We need to see a move back above the 1.2800 area to ensure this rally has legs. Below 1.2600 targets 1.2400. Resistance at the 1.2830 area as well as 1.3000.         EUR/GBP – struggling to rally beyond the 0.8650 area but we need to see a move below the 0.8580 area to signal a short-term top might be in and see a return to the 0.8530 area. Also have resistance at the 100-day SMA at 0.8680.     USD/JPY – failed just below the 144.00 area last week but has rebounded from the 141.50 area. While below the 144.00 area the risk is for a move towards the 140.70 area. Main resistance remains at the previous peaks at 145.00.       FTSE100 is expected to open 8 points lower at 7,546     DAX is expected to open 16 points lower at 15,936     CAC40 is expected to open unchanged at 7,319      

GBP: Starting on the right foot The pound has had a good start to the week, outpacing other G10 currencies: EUR/GBP was pressing the 0.8600 support yesterday. Interestingly, this was not driven by a rebound in the Bank of England rate expectations (peak rate still seen around 5.70-5.75% in January): it appeared, instead, a mirror of supported sentiment in FX, and the pound showing its ever-increasing sensitivity to risk. There will be very little on the domestic side for GBP until Friday when GDP figures are released. Expect the pound’s beta-to-risk sentiment to remain elevated for now: in the longer run, we still think markets are overestimating BoE tightening, will have to scale down expectations and EUR/GBP can climb back to 0.87-0.88

China slips into deflation   By Michael Hewson (Chief Market Analyst at CMC Markets UK)   A disappointing set of China trade numbers for July saw European and US markets selloff sharply yesterday, reinforcing concerns that the Chinese economy is struggling, undermining hopes that the slowdown in Q2, was simply a one-off. If anything, the signs of a slowdown have been there for months for China, given that PPI inflation has been negative all this year, with headline CPI following it at a distance.  This morning headline CPI inflation in China followed the PPI measure into outright deflation for the first time in 28 months, increasing fears that for all the promises of further stimulus measures, Chinese authorities may be facing limitations in the type of stimulus they can implement when it comes to kick starting domestic demand.     CPI inflation fell from 0.2% in June to -0.3% in July, while PPI came in at -4.4%, the 10th month in a row that prices have been negative. Chinese deflation has been the proverbial elephant in the room when it comes to recent tightening measures from the Federal Reserve, the ECB, and Bank of England. How many more rate hikes can we expect in the coming months when there is a clear deflationary impulse coming from Asia, and where is the tipping point when it comes to the risk of overtightening. With recent rebounds in oil prices prompting a rebound in gasoline/petrol prices, along with the clear lags when it comes to the effects of previous rate hikes, does the risk of overtightening outweigh the risks of signalling a pause, and waiting to see the effects of previous rate hikes on consumers as fixed rates roll off.     Tomorrow's US CPI, and Friday's PPI numbers could go some way to answering this question, however it is becoming clearer that central banks are leaning more towards pausing in September, which means we could well have seen the end of the rate hiking cycle for all three, the Federal Reserve, ECB, and Bank of England. Tighter credit conditions for banks were also behind yesterday's sell-off after Italy unexpectedly slapped its banking sector with a 40% windfall tax on its profits for this year. This raised concerns that other European countries like Germany, France and Spain may follow suit.     UK banks also fell back although the prospect of a UK tax is lower given that the banking sector here already pays a higher rate due to the 3% banking levy, on top of the 25% corporation tax rate, although there have been some misguided calls for the UK government to follow suit in a similar fashion to the energy profits levy on energy companies. That would be unwise given it could prompt banks to cut back on lending, and in turn become more risk averse which in turn could impact profits growth, as well as cutting credit into the real economy.       EUR/USD – having failed to consolidate its move above 1.1000 the euro has slipped back with the lows last week just above 1.0900, a key support. We currently have resistance at the 1.1050 area which we need to break to have any chance of revisiting the July peaks at 1.1150.     GBP/USD – gave up its Monday gains having failed to move above the 1.2800 area, however while above the lows last week at 1.2620 area the bias remains higher. We need to see a move back above the 1.2800 area to ensure this rally has legs. Below 1.2600 targets 1.2400. Resistance at the 1.2830 area as well as 1.3000.         EUR/GBP – continues to struggle near the 0.8650 area but we need to see a move below the 0.8580 area to signal a short-term top might be in and see a return to the 0.8530 area. Also have resistance at the 100-day SMA at 0.8680.     USD/JPY – looks set for a retest of the 144.00 area having rebounded from the 141.50 area. While below the 144.00 area the risk is for a move towards the 140.70 area. Main resistance remains at the previous peaks at 145.00.     FTSE100 is expected to open 32 points higher at 7,559     DAX is expected to open 88 points higher at 15,863     CAC40 is expected to open 63 points higher at 7,322  

GBP: Unusually stable BoE rate expectations The data and Bank of England event calendars are empty today and tomorrow in the UK, and will only pick up again on Friday with the release of GDP and industrial production. The lack of domestic events in the UK has helped an unusual period of very stable BoE rate expectations: markets appear rather anchored to the prospect of a peak rate around 5.70-5.75% for now. EUR/GBP has faced some downward pressure, likely due to the negative impact of the Italian bank windfall tax announcement on the euro, but looks unlikely to break out of recent ranges. 0.8600 should continue to be the gravity level for now.      

US CPI expected to edge higher in July    By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets saw a decent rebound yesterday after the Italian government clarified the details around its windfall tax bombshell from earlier in the week. The gains were also helped by a belief that deflation in China could lead to the end of further rate hikes from central banks here in Europe as well as the US.     US markets on the other hand, underwent another negative session as nervousness crept in ahead of today's US inflation numbers, with Nasdaq 100 leading the falls, at the same time as US 2-year yields finished the day higher.  The slowdown in China does raise the risk that central banks might over play their hand when it comes to further rate hikes, while any indication that inflation might start to baseline and turn higher could well complicate matters further as the Federal Reserve decides as to whether it has done enough, or whether they need to hike again in September. This makes today's US CPI for July and tomorrow's PPI numbers extremely important in the decision-making process.     In the last 12 months we've seen US CPI fall from a peak of 9.1% in June last year, slowing to 3% in June, with the slowdown in prices being very much a one-way process. If we do see a move higher to 3.3% which is what is expected there is a concern that might prompt some concern that we've bottomed. Core CPI slowed to 4.8%, in June which was more encouraging, and it is here that the Fed may well choose to focus its attention. With the Federal Reserve having hiked rates by another 25bps in July, there is this sense that further rate hikes beyond July could be a big ask, especially with PPI inflation on the cusp of going negative, when the July numbers get releases tomorrow. That said anyone expecting a straight-line process when it comes to slowing inflation could find that further weakness towards 2% might not be such a straightforward process. Expectations for July are for headline CPI to tick higher to 3.3%, while core prices are expected to slow to 4.7%.      Any indication that we might be at a short-term base when it comes to headline inflation could prompt some concern that the Fed might think about another rate hike at its September meeting, with the next key focus likely to be on the annual Jackson Hole Symposium at the end of the month. US weekly jobless claims are expected to remain steady at around 230k.     EUR/USD – finding support just above the 50-day SMA, with resistance at the 1.1050 area which we need to break to have any chance of revisiting the July peaks at 1.1150. Support at the 1.0900 area.     GBP/USD – remains capped just below the 1.2800 area. We need to see a move back above the 1.2800 area to ensure this rally has legs. We have support at the 1.2620 area. Below 1.2600 targets 1.2400. Resistance at the 1.2830 area as well as 1.3000.         EUR/GBP – continues to struggle near the 0.8650 area but we need to see a move below the 0.8580 area to signal a short-term top might be in and see a return to the 0.8530 area. Also have resistance at the 100-day SMA at 0.8680.     USD/JPY – continues to edge back towards last week's high just below the 144.00 area, having rebounded from the 141.50 area. While below the 144.00 area the risk is for a move towards the 140.70 area. Main resistance remains at the previous peaks at 145.00.     FTSE100 is expected to open 9 points lower at 7,578     DAX is expected to open 92 points higher at 15,944     CAC40 is expected to open 45 points higher at 7,367  

GBP: Housing market pessimism starting to show Earlier today, we saw the release of the RICS UK house price data survey, which showed the most pessimism over UK house prices since early 2009. It will be interesting to see whether this starts to feed more heavily into UK consumer confidence and spending. We also expect it will pressure the pricing of the Bank of England cycle, where another 50bp of tightening is still seen. Next week's release of UK earnings data, plus the July CPI, will be the next major catalyst for this story. EUR/GBP seems happy to trace out an 0.8600-0.8650 range for the time being. But we are happy with our upside bias towards the 0.88 area for later in the year.

UK economy expected to stall in Q2. By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets enjoyed their second successive day of gains yesterday, boosted by the announcement by China to end its ban on overseas travel groups to other countries has also helped boost travel, leisure, and the luxury sector. The gains were also helped by a lower-than-expected rise in US CPI of 3.2%, with core prices slipping back to 4.7%, which increased expectations that we could well have seen the last of the Fed rate hiking cycle, which in turn helped to push the S&P500 to its highest levels this week and on course to post its biggest daily gain since July.     Unfortunately, San Francisco Fed President Mary Daly had other ideas, commenting that the central bank has more work to do when it comes to further rate hikes, which pulled US yields off their lows of the day, pulling stock markets back to break even.   This failure to hang onto the gains of the day speaks to how nervous investors are when it comes to the outlook for inflation at a time, even though Daly isn't a voting member on the FOMC this year, and she's hardly likely to say anything else. Certainty hasn't been helped this week by data out of China which shows the economy there is in deflation, despite recent upward pressure on energy prices.     It also means that we can expect to see a lower open for markets in Europe with the main focus today being on the latest UK Q2 GDP numbers, as well as US PPI for July. Having eked out 0.1% growth in Q1 of this year, today's UK Q2 GDP numbers ought to show an improvement on the previous two quarters for the UK economy, yet for some reason most forecasts are for zero growth. That seems unduly pessimistic to me, although the public sector strike action is likely to have been a drag on economic activity.     Contrary to a lot of expectations economic activity has managed to hold up reasonably well, despite soaring inflation which has weighed on demand, and especially on the more discretionary areas of the UK economy. PMIs have held up well throughout the quarter even as they have weakened into the summer. Retail sales have been positive every month during Q2, rising by 0.5%, 0.1% and 0.7% respectively. Consumer spending has also been helped by lower fuel pump prices, and with unemployment levels still at relatively low levels and wage growth currently above 7%, today's Q2 GDP numbers could be as good as it gets for a while.     Despite the resilience shown by the consumer, expectations for today's Q2 are for a 0% growth which seems rather stingy when we saw 0.1% in Q1. This comes across as surprising given that Q2 has felt better from an economic point of view than the start of the year, with lower petrol prices helping to put more money in people's pockets despite higher bills in April. This raises the prospect of an upside surprise, however that might come with subsequent revisions.       Nonetheless, even as we look back at Q2, the outlook for Q3 is likely to become more challenging even with the benefit of a lower energy price cap, helping to offset interest rates now at their highest levels for over 15 years. With more and more fixed rate mortgages set to get refinanced in the coming months the second half of the year for the UK economy could well be a lot more challenging than the first half.     Yesterday US CPI came in slightly softer than expected even as July CPI edged up to 3.2% from 3% in June. Today's PPI numbers might show a similar story due to higher energy prices, but even here we've seen sharp falls in the last 12 months. A year ago, US PPI was at 11.3%, falling to 0.1% in June, with the move lower being very much one way. We could see a modest rebound to 0.7% in July. Core prices have been stickier, but they are still expected to soften further to 2.3% from 2.4%. 12 months ago, core PPI was at 8.2% and peaked in March last year at 9.6%.       EUR/USD – squeezed above the 1.1050 area yesterday, before failing again, and sliding back below the 1.1000 area. Despite the failure to break higher we are still finding support just above the 50-day SMA. Below 1.0900 targets the 1.0830 area.     GBP/USD – popped above the 1.2800 area yesterday and then slipped back. We need to see a sustained move back above the 1.2800 area to ensure this rally has legs. We have support at the 1.2620 area. Below 1.2600 targets 1.2400. Resistance at the 1.2830 area as well as 1.3000.         EUR/GBP – pushed up to the 100-day SMA with resistance now at the 0.8670/80 area. Support comes in at the 0.8580 area with a break below targeting the 0.8530 area. Above the 100-day SMA targets the 0.8720 area.     USD/JPY – closing in on the June highs at the 145.00 area. This is the key barrier for a move back towards 147.50, on a break above the 145.20 level. Support now comes in at the 143.80 area.     FTSE100 is expected to open 42 points lower at 7,576     DAX is expected to open 70 points lower at 15,926     CAC40 is expected to open 30 points lower at 7,403

05:50BST Tuesday 15th August 2023 UK wage growth set to give Bank of England an extra headache  By Michael Hewson (Chief Market Analyst at CMC Markets UK)     European markets underwent a modestly positive start to the week despite concerns over the Chinese real estate sector which weighed on the FTSE100, as equities tried to bounce back after two weeks of declines. US markets initially struggled during the first half of the session before rallying strongly into the close, led by the Nasdaq 100. Asia markets, which started the week badly have been more mixed today after Japanese GDP beat forecasts, due to a boom in auto exports and tourism, and poor Chinese economic numbers, which once again disappointed.   Despite a strong start to the year Chinese retail sales have struggled to match the performance seen in April when retail sales rose 18.4%. Since that solid gain spending patterns have struggled despite the weak comparatives of an economy that was, for the most part, subject to lockdowns and restrictions.     The May numbers saw a gain of 12.7% when the same rules applied, while June saw another slowdown to 3.1%, as the Chinese economy showed lacklustre growth of 0.8% in Q2, a sharp slowdown from the 2.2% seen in Q1. With the start of Q3 the picture hasn't got any better with July retail sales falling short of expectations, rising 2.5%, instead of the 4% rise expected. Industrial production also came up short, rising 3.7% instead of the 4.3% expected. The statistics bureau also didn't include the figures for youth unemployment, which has risen sharply in recent months, with the 16-24 cohort reaching 21.3% in the June numbers. In a sign that the numbers were going to be poor, or simply because of concerns over the property sector just before the numbers were released, Chinese authorities reduced one-year loan rates by 15bps and reduced the seven-day reverse repo rate by 10bps.       It's set to be an important week for the UK economy, and more importantly for the Bank of England in the context of how many more rate hikes they feel will be necessary in the face of sticky core inflation and record wages growth. Today's wages and unemployment numbers for the 3-months to June are set give the central bank an additional headache as it looks to try and play catch-up after being slow to react to the initial inflation surge. We've already seen the UK unemployment rate rise from 3.7% to 4% in the 3-months to May, since the start of the year as more people return to the workforce as the cost-of-living squeeze pushes people out of retirement. While the unemployment rate has risen from the lows of 3.5% back in August, wage growth has also risen quite sharply over the same period, hitting a record high of 7.3% at the most recent set of numbers, and looks set to rise to a new record of 7.4% today.     Various Bank of England policymakers have expressed concern that higher wages are making it more difficult to rein in core inflation, and that workers should refrain from asking for large pay rises. This tone-deaf response somewhat ignores the Bank of England's role in fuelling this trend in that the reason people are asking for these pay rises is because of the central bank's failure to nip inflation in the bud, when it became apparent to almost everyone except them, that the rise in prices was anything but transitory.     There is a sense now, however, that inflation has peaked, and although still elevated, that upward pressure on wages should start to slow, although it's not likely to happen quickly, with inflation still over 3 times the central bank's target, although it should slow quite sharply when the July figures are released tomorrow.     It's also a big week for the US consumer with the release of US retail sales for July later today, and then the latest earnings numbers from Target and Walmart later this week. After a steady Q2, the US consumer has shown little sign of slowing down when it comes to spending and today's July numbers aren't expected to be any different with a rise of 0.4% expected.     EUR/USD – slid below the 50-day SMA yesterday falling to the 1.0875 area. The main support remains at the 1.0830 area and July lows. Still feels range bound with resistance at the 1.1030 area.     GBP/USD – slipped back to the 1.2615 area yesterday but continues to find support above the 1.2600 area. A break below 1.2600 targets 1.2400. Until then the bias is for a move back above the 1.2800 area through 1.2830 to target 1.3000.        EUR/GBP – came under further pressure yesterday with the 100-day SMA acting as resistance at the 0.8670/80 area. Support comes in at the 0.8580 area with a break below targeting the 0.8530 area. Above the 100-day SMA targets the 0.8720 area.     USD/JPY – has broken above the previous peaks this year at 145.10, opening up the prospect of further gains towards 147.50. Support remains back at the 143.80 area; however, we could also find support at the 144.80 area.     FTSE100 is expected to open 14 points higher at 7,521     DAX is expected to open 44 points higher at 15,948     CAC40 is expected to open 23 points higher at 7,371  

GBP: Sterling enjoys a temporary lift from the wage data Sterling is rallying this morning after wage growth data surprised on the upside. Here is what our UK economist, James Smith, says about the data: "Private sector wage growth is now running at 8.1%, up from 7.9% previously. These figures have been backwardly revised, so not all the upside surprise is in the latest month. But still clearly running much too fast for the BoE's liking and will help cement a September hike. The flip side is that unemployment is clearly rising now and employment on the "single month" measure was down by 360k vs three months ago." James had thought that the wage growth could surprise on the upside, but equally, he feels that tomorrow's release of July CPI could see services inflation surprise on the downside. If he's right, today's EUR/GBP dip below 0.86 should prove temporary. The 0.8550/80 area may well hold in EUR/GBP ahead of tomorrow's CPI release.

GBP: EUR/GBP ready to test the lows Higher than expected wage and inflation numbers pushed the Sonia curve to pricing-in 6.0% rates for the first time in a month. On the inflation side, our UK economist notes in this article how the surprise pick-up in service inflation was primarily due to rents, a factor that should not meet the Bank of England’s definition of “persistent”. While a 25bp September hike should be a done deal, we still think a November move is an open question, given indications of abating price pressures in other parts of the economy. Still, the pound is now enjoying a post-repricing strength that looks unlikely to abate rapidly, given the lack of market-moving data and BoE speakers. EUR/GBP looks on track to retest the 0.8505 July lows, also given the lack of strong idiosyncratic defence for the euro.  

Will Taylor Swift and Barbie help to lift UK retail sales? By Michael Hewson (Chief Market Analyst at CMC Markets UK)   This week hasn't been a good week for the FTSE100, with 4 days of declines on top of a poor finish to the end of last week, with the index down 4% over the last 5 days, and down at 5-week lows. The performance of the DAX has been slightly better, but it is still down by 2% over the same period as concerns about the health of the Chinese economy, along with a sell-off on global bonds causes investors to question how long rates are likely to stay at these sorts of levels.   For so long the debate has been about how high interest rates would be likely to go, and has been framed around the duration period before rates start to get cut again. In the last few days, the frames of reference have started to shift from how high rates are likely to go, towards how long they are likely to stay at current levels if inflation continues to be on the sticky side. US markets continued to slip lower after Europe had closed, as the momentum from the recent technical breaks on the S&P500 and Nasdaq 100 gained momentum, both closing at 5-week lows, as US 10-year yields posted their highest daily close since 2008, with UK gilt yields already back at 2008 levels. Yesterday's weak US close looks set to translate into another weak open for markets here in Europe, putting the FTSE100 on course to post its worst run of daily losses since October last year. While we've heard plenty of alarmist headlines over the effects of global warming in the past few months, at least the weather gave UK consumers a reason to go out and spend in June, beating expectations of a gain of 0.2% by some amount, with a rise of 0.7%.     Not only did sales in supermarkets and food outlets see a decent rebound, but we also saw a strong showing from department stores and furniture outlets. Retail sales have proved to be remarkably resilient in the past few months with gains over the course of April, May, and June. The resilience in wages growth over the past few months may also have played a part in this resilience, however heading into Q3 the big question is whether this can be sustained. Recent spending data from Barclaycard showed entertainment spending rose 15.8% in July on the back of an uptick in spending for live events including Taylor Swift, as well as bookings for holidays after a warm June. We also saw the release of 4 big movie releases during July, including Indiana Jones and the Dial of Destiny, Mission Impossible Dead Reckoning, Barbie, and Oppenheimer. On the flip side, spending on clothing saw a decline due to the wet weather. If we see another positive month for July retail sales, could we call it a Barbie bounce? For the most part expectations aren't especially positive with an expectation that we could see a decline in July retail sales including fuel of -0.6%, which would be the first negative month since March when sales fell by -1.2%. The final reading of EU CPI for July is expected to be confirmed at 5.3%, with core prices at 5.5%.       EUR/USD – currently languishing close to the bottom of its recent range but just above the main support area at the 1.0830 area. Still feels range bound with resistance at the 1.1030 area.     GBP/USD – continues to edge higher back towards the 1.2800 area. Remains well supported above the recent lows at the 1.2600 area. A break below 1.2600 targets 1.2400. A move above the 1.2800 area through 1.2830 could see a move to target 1.3000.           EUR/GBP – slipped back to the 0.8520/30 area, which is holding for now. A move below 0.8500 could see 0.8480. Above the 100-day SMA at 0.8580 targets the 0.8720 area.     USD/JPY – continues to edge higher, towards the 147.50 area. The previous peaks this year at 145.10 should act as support.  A move below the 144.80 area, targets a move back to the 143.10 area.     FTSE100 is expected to open 25 points lower at 7,285     DAX is expected to open 50 points lower at 15,626     CAC40 is expected to open 16 points lower at 7,176  

GBP: Retail sales disappoint The UK released retail sales data for July this morning, and the numbers came in quite markedly below expectations. Retail sales including fuel dropped 1.2% month-on-month, and the ex-auto fuel gauge was down 1.4%. The release is in contradiction with a slew of quite supportive data releases for the pound. However, the FX impact has been quite contained given the very little weight that retail sales are given in the Bank of England’s monetary policy decision equation compared to wage and inflation figures, which instead surprised on the upside this week. The Sonia curve is fully pricing in a 6.0% peak rate in the UK, while markets are not convinced the ECB will hike rates at all. Incidentally, the euro is more exposed to China than the UK. That would suggest the 0.8500 support in EUR/GBP is under threat, and we definitely don’t exclude it will be tested or broken temporarily in the coming days. However, the short-term swap differential when the pair last traded at 0.8500 (mid-July) was around 20-25bp wider in favour of GBP, meaning that a further widening of the monetary policy divergence may well be needed to keep EUR/GBP sustainably depressed.

06:10BST Monday 21st August 2023 China cuts key loan rate by less than expected  By Michael Hewson (Chief Market Analyst at CMC Markets UK)     The last 3 weeks haven't been good ones for markets in Europe, with the FTSE100 bearing the brunt of recent weakness posting its worst daily run of losses since October last year, as well as revisiting its March lows last week. The DAX has fared little better, revisiting the lows in July, as weakness in Asia markets, and China especially, pushed the Hang Seng down 5.89% and into bear market territory, as concerns over China's economy, the solvency of its real estate sector, and any risks of contagion into its financial system.   These concerns were amplified last week after Chinese asset manager Zhonghzi missed a coupon payment, as investors increasingly looked towards possible measures from Chinese authorities to support the economy and their financial system. Thus far we've seen little significant indication of support apart from some modest rate cuts or stimulus at a time when the economy is teetering in deflation, as well as a distinct lack of domestic demand.   This morning China did announce that they were cutting their one-year lending rate by 10bps to 3.45%, however they left their 5-year loan rate unchanged at 4.20%, having cut the medium-term loan rate last week. Unsurprisingly markets were less than impressed by this move, expecting authorities to be much more forceful. This lack of urgency has weighed on Asia markets and is unlikely to spark demand in an economy where loan demand appears to be low anyway. In the UK, the latest Rightmove House price survey saw asking prices cut by 1.9% in August the biggest decline this year as higher mortgage rates weighed on demand for houses. The prospect of another rate hike next month is also likely to be affecting confidence, although the fact we are in August, and in the middle of the school holidays probably also has a part to play.   US markets, which until recently had proved to be much more resilient have also succumbed to the recent weakness in equity markets, also sliding for the third week in succession, with both the S&P500 and Nasdaq 100 breaking below their respective 50-day SMA's in a sign that further losses could be on the way.   The weakness in US markets is altogether being driven by a different concern, namely that of higher interest rates for longer as the US economy, which continues to defy expectations of an economic slowdown, sees Fed policymakers push the prospect of more rate hikes in the coming months, pushing up long term yields to multiyear highs in the process, as the prospect of rate cuts gets pushed even further into the future. With that the main investors focus has become less on how high rates might go, and more on how long they will stay there.     This week is likely to see investor attention on the Jackson Hole Symposium where the topic up for discussion is "Structural Shifts in the Global Economy" This will be closely scrutinised for evidence that we might see a rate pause next month when the Federal Reserve next meets to decide on monetary policy.       When Powell spoke last year, he made it plain that there was more pain ahead for US households and that this wouldn't deter the central bank in acting to bring down inflation, even if it meant pushing unemployment up. His tone this week is unlikely to be anywhere near as hawkish, although he will also be reluctant to declare inflation victory either. It is clear that the Fed believes the fight against inflation is far from over, and in that context it's unlikely he will deliver any dovish surprises       EUR/USD – still looking soft with the main support area at the 1.0830 area. Still feels range bound with resistance at the 1.1030 area. Below 1.0830 targets the 200-day SMA.     GBP/USD – while above the twin support areas at 1.2610/20 bias remains for a move through the 1.2800 area, and on towards 1.3000. A break below 1.2600 targets 1.2400.        EUR/GBP – finding support for now at the 0.8520/30 area. A move below 0.8500 could see 0.8480. Above the 100-day SMA at 0.8580 targets the 0.8720 area.     USD/JPY – continues to edge higher, towards the 147.50 area. Below the 144.80 area, targets a move back to the 143.10 area.       FTSE100 is expected to open 10 points higher at 7,272     DAX is expected to open 15 points higher at 15,589     CAC40 is expected to open 10 points higher at 7,174  

GBP: Holding onto gains, short term The Bank of England's trade-weighted sterling index continues to trade near the highs of the year, no doubt propped up by high short-term interest rates. 3m GBP implied yields of 5.40% make it very expensive to FX hedge positions on UK bond markets, for example. It may well be that this sterling strength endures to the next set of releases on UK wages and CPI (September 12th and 20th respectively), with more mileage to be had against the euro than the dollar given headwinds to the external investment environment. For this week, the UK calendar is light until Wednesday's release of PMI data. EUR/GBP can stay offered in a 0.8500-0.8550 range, while GBP/USD remains trapped well inside last week's narrow range of 1.2615-1.2785.

06:00BST Tuesday 22nd August 2023 UK public sector borrowing set to slow in July   By Michael Hewson (Chief Market Analyst at CMC Markets UK)     We saw a lacklustre start to the week yesterday, European markets just about managing to eke out a small gain, although the FTSE100 finished the day slightly below the flat line, closing lower for the 7th day in a row.    The retreat from the intraday highs appeared to be driven by a rise in yields with both UK and German yields seeing strong gains towards their highs of last week. The move higher in yields also saw US 10-year and 30-year yields hit their highest levels since 2007, but unlike in Europe the rise in yields didn't act as a brake on US markets, which managed solid gains led by the Nasdaq 100. US chipmaker Nvidia was a notable outperformer looking to revisit its record highs of earlier this month ahead of its Q2 earnings which are due to be released tomorrow. As we look ahead to today's European open the strong finish in the US looks set to translate into a similarly positive start here in a couple of hours' time, however it's difficult to escape the feeling that stock markets are starting to look increasingly vulnerable.     Economic uncertainty in China, stagnation or weak growth in Europe and the UK, the only positives appear to be coming from the US where the economy is looking reasonably resilient, hence the rise in yields there. It's slightly harder to explain why yields in the UK and Europe are rising aside from the fact that rates are likely to stay higher for longer.     On the economic data front the only data of note is the latest July public sector borrowing numbers for the UK, which are expected to see a fall to £3.9bn from £17.1bn in May. With total debt now at levels of 100% of GDP the rise in rates is extraordinarily painful given how much of its existing debt is linked to inflation and the retail price index. Having to pay out over £100bn a year in interest is money that might have been better spent elsewhere. It's just a pity that the government didn't take greater advantage of the low-rate environment we saw less than 2 years ago, as had been suggested from a number of quarters at the time. We also have the latest CBO industrial orders for August which are expected to slip back to -12 from -9 in July.     In the US we have July existing home sales which are expected to decline for the second month in a row, by -0.2%. We also have comments from the following Federal Reserve policymakers. Chicago Fed President Austan Goolsbee who leans towards the dovish side will be speaking at an event on youth unemployment alongside the more hawkish Fed governor Michelle Bowman.     We also have Richmond Fed President Thomas Barkin whose most recent comments suggest he sees the prospect of a soft landing for the US economy, although he is not a voting member this year.     EUR/USD – finding support just above the 1.0830 area. Still feels range bound with resistance at the 1.1030 area. Below 1.0830 targets the 200-day SMA.     GBP/USD – continues to look supported while above the twin support areas at 1.2610/20. We need to see a move through the 1.2800 area, to signal potential towards 1.3000. A break below 1.2600 targets 1.2400.       EUR/GBP – continues to find support for now at the 0.8520/30 area. A move below 0.8500 could see 0.8480. Above the 100-day SMA at 0.8580 targets the 0.8720 area.     USD/JPY – looks to be retesting the August highs on the way towards the 147.50 area. Below the 144.80 area, targets a move back to the 143.10 area.     FTSE100 is expected to open 6 points higher at 7,264     DAX is expected to open 48 points higher at 15,651     CAC40 is expected to open 30 points higher at 7,228  

05:40BST Wednesday 23rd August 2023 Flash PMIs set to weaken further in August   By Michael Hewson (Chief Market Analyst at CMC Markets UK)     The FTSE100 managed to finally break its worst run of losses since 2019 yesterday, posting its first daily gain since the 10th August. The gains were hard-won however with the index trying retreating from its daily highs and failing for the second day in a row to consolidate a move above 7,300. The rest of Europe managed to do slightly better, outperforming and closing higher for the 2nd day in a row, although still closing well off the highs of the day.       US markets on the other hand after starting strongly slipped back after European markets had closed, sliding back on comments from Richmond Fed President Thomas Barkin who said the Fed needed to be open to the prospect the US economy might re-accelerate which might mean the central bank might need to hike rates further and keep them higher for longer, pushing the US dollar to its highs for the day in the process. Despite the weaker finish for US markets, the resilience in Asia markets looks set to see European markets open slightly higher later this morning.  The last set of flash PMIs saw German manufacturing slide to its lowest levels since the Covid lockdowns at 38.8 in further signs that the engine of the German economy continues to stutter. Weak demand in its key export markets as well as domestically, along with higher energy prices weighing on economic activity.       The only bright spot was services which came in at 52.3, but even here economic activity was slower, and both sectors are expected to weaken further in August further complication the task of the ECB which is expected to signal a pause in its rate hiking cycle next month. Manufacturing activity is expected to soften further to 38.6, while services is expected to slip to 51.5. Economic activity in France was also disappointing in July, although the underperformance was more evenly distributed with both manufacturing and services both in contraction heading into Q3. Manufacturing slipped to 45.1 in July and services dropped to 47.1. With energy prices rising sharply over the last few weeks, it's hard to imagine a scenario that will see a significant improvement given the weakness seen in China and other overseas markets. Manufacturing is forecast to come in at 45, and services at 47.5.     While economic activity has been slowing in Europe, the UK has also seen similar slowdowns in both manufacturing and services, although the composite PMI is just about hanging on in expansion territory, unlike its peers across the Channel.     Construction has been a notable strong point, however the focus today is on manufacturing which slowed to 45.3 in July, while services slowed from 53.7 in June to 51.5 in July. The recent GDP numbers for June showed a strong performance, however Q3 is likely to be much more challenging, with higher oil and gas prices likely to filter through at the petrol pump. UK manufacturing is expected to slow to 45, and services to 51.     US manufacturing and services look set to be more resilient at 49 and 52 respectively.      EUR/USD – continues to find support just above the 1.0830 area. Below 1.0830 targets the 200-day SMA at 1.0790 and trend line support from the March lows at 1.0750. Still feels range bound with resistance at the 1.1030 area.     GBP/USD – failing at the 50-day SMA again and the 1.2800 area. We need to see a move through the 1.2800 area, to signal potential towards 1.3000. A break below 1.2600 targets 1.2400.           EUR/GBP – sinking towards support at the 0.8520/30 area. A move below 0.8500 could see 0.8480. Above the 100-day SMA at 0.8580 targets the 0.8720 area.     USD/JPY – failed to push above the 146.50 area yesterday,but while above the 144.80 area bias remains for a move towards 147.50. Below the 144.80 area, targets a move back to the 143.10 area.     FTSE100 is expected to open 10 points higher at 7,280     DAX is expected to open 42 points higher at 15,747     CAC40 is expected to open 14 points higher at 7,255

GBP: Volatile pricing ahead of PMIs Bank of England rate expectations have been quite volatile since the upside surprise in wages and CPI last week. The miss in retail sales on Friday saw peak Bank rate expectations as measured in the Sonia rate drop more than 10bp. Markets are currently looking at 5.95-6.0%, but today’s PMI release in the UK may well move pricing again. Consensus is expecting some slowdown in both manufacturing (already in contraction territory) and services (to 51.0). The Bank of England will also look at the details of the survey searching for evidence that price pressures are abating. EUR/GBP can make another attempt at breaking 0.8500 today, although the sustainability of sub-0.8500 levels is questionable unless markets price in more rate hikes in the UK or price out tightening in the eurozone.

05:40BST Thursday 24th August 2023 Positive start expected after Nvidia knocks it out of the park   By Michael Hewson (Chief Market Analyst at CMC Markets UK)     Despite a raft of disappointing economic data from France, Germany and the UK which saw services activity slide into recession territory, European equity markets managed to finish the day higher yesterday. Rather perversely markets took these data misses as evidence that rate hikes were starting to work and that further rate hikes were likely to be unnecessary, sending bond yields sharply into reverse, as markets started to price an increased probability of recession. Yesterday's economic data will certainly offer food for thought for central bankers as they get set to assemble today at Jackson Hole for the start of the annual symposium, ahead of interest rate meetings next month where they are likely to decide whether to raise rates further to combat sticky inflation. If yesterday's data is in any way reflective of a direction of travel, then we could see a Q3 contraction of 0.2%. Of course, one needs to be careful in reading too much into one month of weak PMIs, especially in August when a lot of industry tends to shutdown or pare back economic activity, however the weakness in services was a surprise given that the summer holidays tend to see that area of the economy perform well.     US markets also underwent a strong session led by the Nasdaq 100 in anticipation of a strong set of numbers from Nvidia with the bar set high for a strong set of Q2 numbers. Back in Q1 when Nvidia set out its revenue guidance for Q2 there was astonishment at the extent of the upgrade to $11bn. This was a huge increase on its Q2 numbers of previous years, or any other quarter, with the upgrade being driven by expectations of a big increase in sales of data centre chips, along with investments in Artificial Intelligence.       Last night Nvidia crushed these estimates with revenues of $13.5bn, datacentre revenue alone accounting for $10.3bn of that total, a 171% increase from a year ago. For comparison, in Q1 datacentre revenue accounted for $4.3bn. Gross margins also beat expectations, coming in at 71.2% as profits crushed forecasts at $2.70 a share. Nvidia went on to project Q3 revenues of $16bn, plus or minus 2%. The company also approved an extra $25bn in share buybacks, with the shares soaring above this week's record highs in after-hours trading, with the big test being whether we'll see those gains sustained when US markets reopen later today.     On the back of last night's positive finish, as well as the exuberance generated by the belief that interest rate hike pauses are coming next month, European markets look set to open higher later this morning. The focus today is on the latest set of weekly jobless claims numbers which are set to remain unchanged at 239k, as well as July durable goods orders, excluding transportation, which are forecast to see a rise of 0.2%, a modest slowdown from June's 0.5% gain.      EUR/USD – bounced off the 200-day SMA at 1.0800 with support just below that at trend line support from the March lows at 1.0750. Still feels range bound with resistance at the 1.1030 area.     GBP/USD – the 1.2600 area continues to hold with resistance still at the 1.2800 area and 50-day SMA. A break below 1.2600 targets 1.2400.        EUR/GBP – briefly hit an 11-month low at 0.8490 before rebounding sinking towards support at the 0.8520/30 area. A move below 0.8500 could see 0.8480. Above the 100-day SMA at 0.8580 targets the 0.8720 area.     USD/JPY – the failure to push above the 146.50 area has seen a pullback below the 145.00 level. This raises the prospect of a move towards the 50-day SMA at 142.70 area.     FTSE100 is expected to open 24 points higher at 7,344     DAX is expected to open 70 points higher at 15,798     CAC40 is expected to open 36 points higher at 7,282  

GBP: Short term rates remain the key driver Yesterday's price action in EUR/GBP was telling. EUR/GBP briefly dipped under 0.8500 on the soft eurozone PMI releases only to surge to 0.8565 on the soft UK services PMI release. The soft UK data took a large 15bp out of pricing for the Bank of England (BoE) tightening cycle. We still think that the BoE will not deliver on the 60bp of tightening still priced by the markets and that EUR/GBP can later this year move back to the 0.87 area. The only UK data of note today is the August CBI retail sales numbers and we suspect EUR/GBP continues to trade a 0.8500-0.8550 range, while Cable is quite steady near 1.2700 too.

All ears on Powell and Lagarde at Jackson Hole today   By Michael Hewson (Chief Market Analyst at CMC Markets UK)     After an initially positive start to the day yesterday, only the FTSE100 managed to eke out any sort of gains, after a rebound in yields and the fading of the Nvidia sugar rush saw European markets slip into negative territory.   US markets, having started very much in a positive vein with the Nasdaq 100 leading the way higher, also turned tail as bond yields pushed higher, along with the US dollar, finishing the day sharply lower. As we look towards today's European open, the rise in yields and weak finish in the US, as well as weakness in Asia this morning, is set to see European markets open lower this morning. Much of the narrative for this month was supposed to be centred around what Fed chair Jay Powell would likely say at Jackson Hole today with respect to the prospect of another pause in the rate hiking cycle when the FOMC meets next month.   This week's poor economic data out of Germany and France has shifted the spotlight a touch when it comes to central bank policy towards the European Central Bank and Christine Lagarde's speech, at 8pm tonight, after Powell who is due to speak at 3:05pm.   While this year's Symposium is titled "Structural Shifts in the Global Economy" it won't be just Jay Powell whose words will be closely scrutinised for clues about rate pauses next month it will also be the Bank of England and the Bank of Japan where markets will be looking for important insights into the risks facing central banks in terms of the risks in over tightening monetary policy at a time when the challenges facing the global economy are numerous.   This week's PMIs have highlighted the challenges quite clearly to the point that it appears the ECB may well also look at a rate pause next month, alongside the Federal Reserve, although the reasons for an ECB pause are less about inflation falling back to target, than they are about a tanking economy.   The latest German PMIs suggest the prospect of another quarter of contraction in Q3, while the Bank of England has a similar problem, although the bar for a pause next month is slightly higher given how much higher UK CPI is relative to its peers.   Before we hear from ECB President Christine Lagarde, Powell will set the scene just after US markets open, and his tone is likely to be slightly less hawkish than he was a year ago.  When Powell spoke last year, he made it plain that there was more pain ahead for US households and that this wouldn't deter the central bank in acting to bring down inflation, even if it meant pushing unemployment up. While Powell is unlikely to be anywhere near as hawkish, as he was last year, he won't want to declare victory either. As we already know from recent comments from various Fed officials it is clear the Fed believes the fight against inflation is far from over, and in that context it's unlikely he will deliver any dovish surprises.   This belief of a slightly hawkish Powell is likely to have been behind yesterday's sharp declines in US markets, which were driven by rising yields as investors continued to price in higher rates for longer. Not even a set of blow-out earnings from Nvidia was enough to keep markets in the black, with the shares opening at a new record high above $500, before sliding back to finish on the lows of the day, closing unchanged. The inability to hold onto any of the early gains suggests that the recent enthusiasm for this $1trn chipmaker may be due a pause. While investors will be focussing on Powell, the focus today returns to the German economy and in the wake of this week's poor PMIs we'll be getting the latest snapshot of the business sentiment in Europe's largest, but also sickest economy, as well as the final reading of Q2 GDP.   The most recent German IFO business climate survey showed sentiment falling to its lowest level since October last year in July at 87.3 and is expected to slow further to 86.8. Expectations also slipped back to 83.5 suggesting the economy could remain in recession in Q3.   Any thoughts that we might see an improvement in August are likely to have been dealt a blow by the sharp rise in oil prices seen in the last few weeks, as well as this week's PMIs. With recent economic data out of China also suggesting a struggling economy, German exporters are likely to continue to find life difficult.        EUR/USD – sinking below the 200-day SMA at 1.0800 with support just below that at trend line support from the March lows at 1.0750. Still feelsrange bound with resistance at the 1.1030 area.   GBP/USD – slipped below the 1.2600 area which could well open up a move towards 1.2400 and the 200-day SMA.  We still have resistance at the 1.2800 area and 50-day SMA.       EUR/GBP – the rebound off this week's 11-month low at 0.8490 looks set to retest the 0.8600 area. We also have resistance at the 0.8620/30 area.   USD/JPY – rebounded off the 144.50 area with resistance at the highs this week at the 146.50 area, with resistance also at 147.50.   FTSE100 is expected to open 5 points lower at 7,328   DAX is expected to open 39 points lower at 15,582   CAC40 is expected to open 16 points lower at 7,198    

GBP: Broadbent speaks tomorrow at Jackson Hole Ben Broadbent is the only Bank of England member speaking at Jackson Hole, but his remarks are scheduled for tomorrow, so we’ll need to wait for Monday to see any impact on sterling. The recent volatility in the BoE peak rate expectations on the back of data releases (wages, inflation, retail sales, PMIs) means the return of some BoE comments after a long period of silence can definitely move the market. It’s worth noting, however, that UK markets are closed on Monday for a national holiday so volumes will be thinner. For today, the pound will be moved by Powell and Lagarde. We think Cable should find good support around 1.2500 in the event of more USD strength, while EUR/GBP can extend its rally beyond 0.8600 if we are right about Lagarde sounding hawkish today.

GBP: Light calendar this week The pound has started the week modestly stronger, partly helped by some hawkish comments over the week at Jackson Hole by Bank of England Deputy Governor Ben Broadbent, who stressed that inflation is unlikely to slow down as fast as it emerged and that monetary policy will need to remain in restrictive territory for some time. Aside from that, the pound is being helped by a tentative risk-on/dollar-off as London markets re-open after yesterday’s UK national holiday. This week’s calendar in the UK is quite light, meaning that GBP will likely continue to be driven primarily by external factors. One event to keep an eye on is a speech by BoE Chief Economist Huw Pill on Thursday. Cable could find support if we are right to think markets may scale back some bullish dollar positions before having confirmations from US payrolls. When it comes to EUR/GBP, it will be all about the EUR leg and the eurozone’s inflation numbers this week. In line with our bullish euro call, we see a break above 0.8600 as very feasible.

06:00BST Wednesday 30th August 2023 US ADP set to slow in August   By Michael Hewson (Chief Market Analyst at CMC Markets UK)     We've seen a strong start to the week for European markets with the FTSE100 outperforming yesterday due to playing catch-up as result of the gains in the rest of Europe on the Monday Bank Holiday. US markets also saw a strong session, led by the Nasdaq 100 as yields retreated on the back of a sharp slowdown in US consumer confidence in August, and a fall in the number of vacancies from 9165k to 8827k in July, and the lowest level since March 2021.     The sharp drop in the number of available vacancies in the US helps to increase the probability that the Federal Reserve will be comfortable keeping rates unchanged next month, if as they claim, they are data dependent, and that rates are now close to restrictive territory.   This belief was reflected in a sharp fall in bond yields, as well as a slide in the US dollar, however one should also remember that the number of vacancies is still well above pre-pandemic levels, so while the US labour market is slowing, it still has some way to go before we can expect to see a significant move higher in the unemployment rate. Today's ADP jobs report is likely to reflect this resilience, ahead of Friday's non-farm payrolls report. The ADP report has been the much more resilient report of the two in recent months, adding 324k in July on top of the 455k in June. This resilience is also coming against a backdrop of sticky wages, which in the private sector are over double headline CPI.   Nonetheless the direction of travel when it comes to the labour market does suggest that jobs growth is slowing, with expectations for that jobs growth will slow to 195k in August. We also have the latest iteration of US Q2 GDP which is expected to underline the outperformance of the US economy in the second quarter with a modest improvement to 2.5% from 2.4%, despite a slowdown in personal consumption from 4.2% in Q1 to 1.6%.     More importantly the core PCE price index saw quarterly prices slow from 4.9% in Q1 to 3.8%. The resilience in the Q2 numbers was driven by a rebuilding of inventory levels which declined in Q1. Private domestic investment also rose 5.7%, while an increase in defence spending saw a rise of 2.5%.     Before the release of today's US numbers, we also have some important numbers out of the UK, with respect to consumer credit and mortgage approvals for July, and Germany flash inflation for August. Mortgage approvals in June saw a surprise pickup to 54.7k, which may well have been down to a rush to lock in fixed rates before they went higher. July may well see a modest slowdown to about 51k.   Net consumer credit was also resilient in June, jumping to £1.7bn and a 5 year high, raising concerns that consumers were going further into debt to fund lifestyles more suited to a low interest rate environment. This level of credit is unlikely to be sustained and is expected to slow to £1.4bn.     As long as unemployment remains close to historically low levels this probably won't be too much of a concern, however if it starts to edge higher, or rates stay higher for an extended period of time, we could start to see slowdown in both, as previous interest rate increases start to bite in earnest.     In comments made at the weekend deputy governor of the Bank of England Ben Broadbent said he that interest rates will need to be higher for longer despite recent declines oil and gas prices as well as producer prices. These comments prompted a sharp rise in UK 2 year and 5-year gilt yields yesterday, even as US yields went in the opposite direction. This rise came against a welcome slowdown in the pace of UK shop price inflation which slowed to 6.9% in August.     Headline inflation in Germany is expected to slow to 6.3% from 6.5% in July, however whether that will be enough for Bundesbank head Joachim Nagel to resile from his recent hawkishness is debatable. As we look towards European session, the continued follow through in the US looks set us up for another positive start for markets in Europe later this morning.     EUR/USD – rebounded off trend line support from the March lows at 1.0780 yesterday. Still feels range bound with resistance at the 1.1030 area, and a break below 1.0750 looking for a move towards the May lows at 1.0630.     GBP/USD – has rebounded from the 1.2545 area, but the rally feels a little half-hearted. We need to push back through the 1.2800 area to diminish downside risk and a move towards 1.2400.         EUR/GBP – the rebound off last week's 11-month low at 0.8490 has seen a retest and break of the 0.8600 area, however we need to push through resistance at the 0.8620/30 area to signal further gains, towards the 50-day SMA resistance.     USD/JPY – wasn't able to push through resistance at 147.50 and has slipped back. This remains the key barrier for a move towards 150.00. Support comes in at last week's lows at 144.50/60.   FTSE100 is expected to open 28 points higher at 7,493     DAX is expected to open 49 points higher at 15,980     CAC40 is expected to open 21 points higher at 7,394

GBP: Unlucky bystander The lack of domestic data releases has left the pound moving merely in line with global dynamics. Yesterday’s drop in the dollar sent Cable above 1.2650, a smaller rally compared to other peers. This morning, GBP/USD is inching lower along with other dollar crosses, although it appears that the pound’s sensitivity to risk sentiment is a bit more limited at this moment. EUR/GBP is the pair to watch today as inflation data in the eurozone are released. The pair broke above 0.8600 yesterday, and signs of resilient inflation in Spain and Germany could see the rally extend to test the 0.8640 100-day MA.   On the UK side, it will be worth watching mortgage approval figures for July along with other credit statistics. Surging rates and declining demand for loans have already triggered a house price correction in the country.

Key inflation numbers set to tee up ECB for September pause?     By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets underwent a bit of a pause yesterday with a mixed finish, although the FTSE100 did manage to eke out a gain, hitting a two-week high as well as matching its best run of daily gains since mid-July. US markets continued to track higher, with the Nasdaq 100 and S&P500 pushing further above their 50-day SMAs, with both closing at a two-week high, for their 4th day of gains.   As we look towards today's European session, the focus today returns to inflation, and more importantly whether there is enough evidence to justify a pause in September from both the ECB as well as the Federal Reserve, as we get key flash inflation numbers from France, Italy, and the EU, as well as the latest core PCE inflation numbers for July from the US.   Over the course of the last few weeks there has been increasing evidence that the eurozone economy has been slowing sharply, with the recent flash PMIs showing sharp contractions in both manufacturing and the services sector. Other business surveys have also pointed to weakening economic activity although prices have also been slowing, taking some of the pressure off the ECB to continue to hike aggressively.   At the last ECB meeting President Lagarde suggested a pause might be appropriate at the September meeting, acknowledging that policy was starting to become restrictive. We've also seen some ECB policymakers acknowledging the risks of overtightening into an economic slowdown, while on the flip side head of the Bundesbank Joachim Nagel has insisted further rate hikes are likely.   Yesterday's Germany and Spain flash CPI numbers for August highlight the ECB's problem, with Spain CPI edging up in August to 2.4% with core CPI slowing modestly to 6.1%. Headline inflation in Germany only slowed modestly to 6.4% from 6.5%.   Today's headline EU flash CPI numbers are therefore expected to be a key test for the ECB, when they meet on 14th September especially if they don't slow as much as markets are pricing. French CPI is expected to accelerate to 5.4% in August while Italy CPI is forecast to slow to 5.6%.   EU headline CPI is forecast to slow to 5.1% from 5.3%, with core prices expected to slow to 5.3% from 5.5%, although given the divergent nature of the various CPI readings of the big four eurozone economies there is a risk of an upside surprise.    The weaker than expected nature of this week's US economic data has been good news for stock markets, as well as bond markets, in so far it has helped to reinforce market expectations that next month's Fed meeting will see US policymakers vote to keep rates on hold.   A slowdown in job vacancies, a downgrade to US Q2 GDP and a weaker than expected ADP jobs report for August appears to show a US economy that is not too hot and not too cold.   Even before this week's economic numbers the odds had already been leaning towards a Fed pause when the central bank meets in September, even if there is a concern that we might still see another rate hike later in the year.   These concerns over another rate hike are mainly down to the stickiness of core inflation which only recently prompted a sharp move higher in longer term rates, causing the US yield curve to steepen off its June lows. The June Core PCE Deflator numbers did see a sharp fall from 4.6% in May to 4.1% in June, while the deflator fell to 3% from 3.8%.   Today's July inflation numbers could prompt further concern about sticky inflation if we get a sizeable tick higher in the monthly, as well as annual headline numbers, reversing some of the decline in bond yields seen so far this week.   When we got the July CPI numbers earlier this month, we saw evidence that prices might struggle to move much lower, after headline CPI edged higher to 3.2%. This could translate into a similar move today with a move higher to 3.3% in the deflator, and to 4.2% in the PCE core deflator.     Personal spending is also expected to rise by 0.7% in July, up from 0.5% in June. Weekly jobless claims are expected to remain steady, up slightly to 235k.       EUR/USD – the rebound off the 1.0780 trend line support from the March lows continues to gain traction, pushing up to the 1.0950 area. We need to push through resistance at the 1.1030 area, to signal a return to the highs this year.   GBP/USD – another day of strong gains has seen the pound push back above the 1.2700 area. We need to push back through the 1.2800 area to diminish downside risk and a move towards 1.2400.       EUR/GBP – the failure to push through resistance at the 0.8620/30 area yesterday has seen the euro slip back towards the 0.8570/80 area. While the 50-day SMA caps the bias is for a retest of the lows.   USD/JPY – the 147.50 area remains a key resistance. This remains the key barrier for a move towards 150.00. Support comes in at last week's lows at 144.50/60.   FTSE100 is expected to open 6 points higher at 7,479   DAX is expected to open 30 points higher at 15,922   CAC40 is expected to open 13 points higher at 7,377  

05:55BST Friday 1st September 2023 A soft US payrolls report could seal a Fed pause later this month   By Michael Hewson (Chief Market Analyst at CMC Markets UK)     After 6 days of gains, the FTSE100 ended the month on a sour note bringing the curtain down on a negative month for European markets, as sentiment soured somewhat on concerns over the outlook for interest rates, and the China recovery story.     US markets also ended a similarly negative month on a downbeat note, although we have seen a shift in some of the negative sentiment in the past few days due to softer than expected US economic data which has brought yields lower and encouraged the idea that this month's Fed meeting will see US policymakers vote to keep rates on hold. This week we've seen the number of job openings for July slow to their weakest levels since March 2021, a sharp slowdown in August consumer confidence, a weaker than expected ADP payrolls report, and a downgrade to US Q2 GDP.     US continuing claims also rose sharply to a 6-week high, suggesting that recent rate hikes were starting to exert pressure on the US economy and a tight labour market. If today's non-farm payrolls report shows a similarly modest slowdown in the rate of jobs growth, then there is a very real sense that we could see further gains in stock markets, as bets increase that the Federal Reserve may well be done when it comes to further rate hikes. At the very least it could go some way to signalling a pause as the US central bank looks to assess the effects recent rate hikes are having on the US economy.     In July we saw another modest slowdown in jobs growth, along with downward revisions to previous months. 187k jobs were added, just slightly above March's revised 165k, although the unemployment rate fell to 3.5%, from 3.6%.     While the official BLS numbers have been showing signs of slowing, up until this week's 177k, the ADP report had proven to be much more resilient, adding 371k in July on top of the 455k in June. The resilience in the US labour market is also coming against a backdrop of sticky wages, which in the private sector are over double headline CPI, while on the BLS measure average hourly earnings remained steady at 4.4% and are expected to stay around this level.       Today's August payrolls are set to see paint another picture of a resilient but slowing jobs market with expectations of 170k jobs added, with unemployment remaining steady at 3.5%, although it is important to remember that whatever today's jobs numbers tell us, vacancies in the US are still well above pre-Covid levels on a participation rate which is also lower at 62.6%.     After the payroll numbers we also have the latest ISM manufacturing report which is expected to continue to show that this part of the US economy is in contraction territory for the 10th month in a row. Before today's US payrolls report, we'll also get confirmation of the dire state of the manufacturing sector in Europe with the final August PMIs from Spain, Italy, France and Germany, with expectations of 48.8, 45.7, 46.4 and 39.1 respectively.     UK manufacturing PMI similarly is also expected to be confirmed at 42.5 and the lowest level since June 2020. Weak numbers here, along with similarly weak services numbers next week will also go a good way to ensuring that the ECB and perhaps even the Bank of England err on the side of a pause when they also meet later this month.     The bar to a pause for the Bank of England appears to be a much higher one, however yesterday's comments from Chief Economist Huw Pill would appear to suggest that the MPC is already leaning towards the idea that monetary policy in the UK is already restrictive. In a speech made in South Africa he said that he preferred to see a rate profile along the lines of a "Table Mountain" approach, in other words keeping them at current levels, or even a little higher for a lengthy period of time. The contents of the speech appeared to suggest that while inflation levels remained elevated, there was an acknowledgement that a lot of the recent rate hikes hadn't yet been felt, raising the risk of overtightening, and that monetary policy was already sufficiently restrictive. This would appear to suggest that a consensus is growing that the Bank of England could be close to the end of its rate hiking cycle, with perhaps one more at most set to be delivered in September.     There also appears to be an increasing debate over the sustainability of the current 2% inflation target as being too low given current levels of inflation, with arguments being made for increasing it to 3% or 4%. The 2% target has been a key anchor of central bank monetary policy over the last 30-40 years, and while it has served a useful purpose in anchoring inflation expectations some are arguing that trying to return it to 2% could do more harm than good.     That may well be true, but there is also the argument that in moving the goalposts on the current inflation target now sends the message that central banks are going soft in getting inflation under control, and that rather than return it to target over a longer period, it's easier to move the goalposts.     This comes across as unwise particularly in terms of timing. The time to have moved the inflation target was when inflation was below or at 2%, not while it is miles above it. Optics are everything particularly when inflation is well above target, with central banks needing to send the message that inflation remains their number one priority, and not water down their long-term commitment to it because it's too hard. The time to discuss a change of a target is when that target has been met and not before. Once that happens in perhaps 1-2 years' time the discussion on an inflation target, or an inflation window of between 1.5% to 3.5% can begin.       EUR/USD – the retreat off the 1.0950 area this week has seen the euro slip back with the 1.0780 trend line support from the March lows coming back into view. We need to push through resistance at the 1.1030 area, to signal a return to the highs this year. Below 1.0750 targets 1.0630.     GBP/USD – pushed up the 1.2750 area earlier this week but has failed to follow through. We need to push back through the 1.2800 area to diminish downside risk and a move towards 1.2400.         EUR/GBP – having failed at the 0.8620/30 area earlier this week has seen the euro slip below the 0.8570/80 area. While the 50-day SMA caps the bias is for a retest of the lows.     USD/JPY – the 147.50 area remains a key resistance and remains the key barrier for a move towards 150.00. Support comes in at last week's lows at 144.50/60.     FTSE100 is expected to open 16 points higher at 7,455     DAX is expected to open 50 points higher at 15,997     CAC40 is expected to open 21 points higher at 7,335

GBP: Table top mountain The UK rates curve softened by 9-10bp yesterday on comments by Bank of England Chief Economist Huw Pill, that the policy rate profile would look more like a "table mountain" – the inference here is that high rates would be kept for longer than the need to take rates much higher per se. However, the market still prices another 50bp of tightening into next year, which is 25bp too much in our opinion. The risk of re-pricing looks greater for the BoE than the ECB curve and keeps us positive on EUR/GBP. Levels in the 0.8500/8550 area should be good for corporates to hedge GBP receivables or EUR payables.  

Flash HICP in August 5.3% (5.1% expected, 5.3% in July) Flash core HICP in August 5.3% (5.3% expected, 5.5% in July) Key moving average provides resistance once again   Eurozone economic indicators this morning have been something of a mixed bag, although traders seem enthused on the back of them rather than disappointed. We’ve seen regional data over the last couple of days which gave us some indication of how today’s HICP report would look and a drop in the core reading in line with expectations combined with no decrease in the headline seemed to make sense. Unemployment, meanwhile, remained at a record low despite an increase in the number of those unemployed. Perhaps there’s some relief that the headline HICP rate didn’t tick a little higher while the core did decline which combined with expectations for the coming months gives the ECB plenty to debate. Another hike in September still strikes me as more likely than not but on the back of this release, markets are swinging the other way, pricing in a near 70% chance of no increase.   ECB Probability   That’s helped the euro to slide more than 0.5% against the dollar this morning – similar against the yen and a little less against the pound while regional markets are seemingly unmoved and continue to trade relatively flat.   Further bearish technical signals following the eurozone data While the fall against the pound was a little less significant, it has enabled it to once again rotate lower off the 55/89-day simple moving average band, reinforcing the bearish narrative in the pair. EURGBP Daily   Source – OANDA on Trading View It’s run into resistance on a number of occasions around the upper end of this band, with the 100 DMA (blue) arguably being a more accurate resistance zone over the summer. Regardless, that still leaves a picture of lower peaks and relatively steady support around 0.85. While that may simply be consolidation, the lower peaks arguably give it a slight bearish bias, a significant break of 0.85 obviously being needed to confirm that.    

European markets set to open higher after Dow posts best week since July  By Michael Hewson (Chief Market Analyst at CMC Markets UK)     The August jobs report was one of those reports which had something for everyone, which perhaps explains the rather bizarre market reaction to last Friday's numbers. Bond yields, as well as the US dollar slid back sharply in the aftermath of the report, however those losses proved to be short-lived, as the US dollar rebounded, and yields finished the day higher. On the headline number the jobs report for August beat expectations, coming in at 187k, however the unemployment rate rose from 3.5% to 3.8%, although part of that can be explained by a rise in the participation rate to 62.8% from 62.6%, putting US worker participation in the workforce at its highest level since the US economy reopened after Covid.     We also saw sharp revisions lower to both the June and July payrolls report, with July revised down to 157k from 187k, while June was revised down from 209k to 105k. Wage growth was also softer at 4.3% pointing to a welcome slowdown as far as the Federal Reserve is concerned when it comes to the narrative surrounding the US economy.     From the Fed's point of view this is exactly the type of report they would have wanted to see to justify keeping monetary policy unchanged this month. If that trend continues, and there's no reason to suppose it won't then it's quite reasonable to assume that we could well have seen the last of Fed rate hikes for this economic cycle.     This means that the narrative will soon shift to when we can expect the first rate cut, although the late rebound in the US dollar on Friday somewhat runs contrary to that interpretation. The rebound in yields is probably easier to explain given that they still finished the week quite a bit lower, with the US 2-year yield finishing the day higher, even as it closed below the lows of the last two weeks.   In any case the August jobs report helped round off a positive week for US markets, while European markets also finished higher, despite undergoing a Friday decline.     This divergence appears to suggest that investors have more confidence in the resilience of the US economy in the short term, than in Europe, where the economic data is much less impressive. With US markets off for the annual Labour Day holiday today is likely to be a relatively quiet day for European markets, even as we get set for a period of important central bank rate meetings starting this week with the RBA tomorrow and the Bank of Canada on Wednesday, although we can look forward to a positive open, after Asia markets rallied on optimism over further measures by China to help its property market.     Both central bank meetings this week should set us up for3 weeks of policy stasis on the central bank front with the ECB next week, and the Federal Reserve, SNB, Bank of England and the Bank of Japan the week after, although in the BOE's case the decision is slightly tilted towards one more hike.     We also have the August services PMIs tomorrow which are expected to point to a weakening services sector in both Europe and the UK, thus making further rate hikes a risky endeavour on the part of the ECB and BOE.       EUR/USD – slid back to August lows at the 1.0760/70 area, and the trend line from the March lows. A break of the 1.0750 area potentially opens up a move towards the 1.0630 level. Resistance remains back at the highs last week at 1.0945.     GBP/USD – having failed to push above the 1.2750 area last week, the pound has slipped back with the next support at the August lows at 1.2545.  We need to push back through the 1.2800 area to diminish downside risk and a move towards 1.2400.         EUR/GBP – having failed at the 0.8620/30 area last week we've seen the euro slip below the 0.8570/80 area. While the 50-day SMA caps, the bias is for a retest of the lows at 0.8500.     USD/JPY – slipped back towards the support area at 144.50 before snapping back sharply on Friday. The 147.50 area remains the key barrier for a move towards 150.00. Support comes in at last week's lows at 144.40/50.     FTSE100 is expected to open at 7,464     DAX is expected to open at 15,840     CAC40 is expected to open at 7,296

GBP: Still digesting Pill's comments With a UK calendar offering very little on the data side, sterling markets are still digesting last week’s comments by Bank of England’s Chief Economist Huw Pill who explicitly favoured a “higher for longer” approach over a “higher peak”. Markets are currently pricing in a lower peak rate, at around 6.70% at the moment, although a September hike is fully priced in and is ING’s base case too. For now, EUR/GBP may stay around 0.8540/0.8570 given now major inputs in the eurozone and the UK calendar. However, in line with our call for an ECB surprise hike next week, we expect another jump above 0.8600 next week. Francesco Pesole

06:15BST Tuesday 5th September 2023 Services PMIs set to confirm contraction, RBA leaves rates unchanged  By Michael Hewson (Chief Market Analyst at CMC Markets UK)     European markets struggled for gains yesterday in the absence of US markets, as the initial boost of a China stimulus inspired rally in Asia faded out, even though basic resources outperformed. This late weakness in the European day looks set to continue this morning.      The day began brightly when Asia markets rallied on signs that China's recent stimulus measures were helping to boost the property sector, after a jump in China home sales in two major Chinese cities helped to propel the Hang Seng to 3-week highs. This followed on from the Friday boost of a US jobs report, which added to the argument that the Federal Reserve would be able to keep rates on hold when they meet later this month.     The return of US markets after yesterday's Labour Day holiday should offer a bit more depth to today's price action in Europe with the focus today set to be on the services PMIs for August, after the RBA left Australian interest rates unchanged at 4.10% earlier this morning, and the latest Chinese Caixin services PMI slipped back to its weakest this year at 51.8. No surprises from the RBA keeping rates on hold for the 3rd time in a row, with little indication that rates will be cut in the future, with the central bank insistent that inflation remains too high, and that it will take until late 2025 for prices to return to the 2-3% target range.     For most of this year it has been notable that services PMIs on both sides of the Atlantic have managed to offset the weakness in manufacturing in the form of keeping their respective economies afloat. The strength of services has been a major factor behind the hawkishness of central banks in their efforts to contain inflation with prices and other related costs proving to be much stickier than other areas of the economy, due to high levels of employment and tight labour markets.       In the last couple of months there has been rising evidence that this trend has started to shift with the August flash PMIs from Germany and France seeing a sharp drop off in economic activity. This weakness translated into a sharp slide in services sector activity in both France and Germany during August to 46.7 and 47.3, with Italy and Spain also set to show a similar slowdown, although given the size of their tourism sectors they should be able to avoid a contraction, with Italy expected to slow to 50.4 and Spain to 51.5.     Today's numbers could well be the final piece of the puzzle when it comes to whether the ECB decides to pause its rate hiking cycle, even as August inflation saw an unwelcome tick higher. Further complicating the picture for the ECB is the fact that PPI has been in negative territory for the last 3 months on a year-on-year basis and looks set to slide even further into deflation territory in July. On a month-on-month basis we can expect to see a decline of -0.6% which would be the 7th monthly decline in a row. On a year-on-year basis prices are expected to fall by -7.6%.   On the PMI front the UK services sector is expected to confirm a fall to 48.7 from 51.5 in June, in a sign that higher prices are finally starting to constrain consumer spending.     EUR/USD – holding above the August lows at the 1.0760/70 area for now, as well as the trend line from the March lows. A break of the 1.0750 area potentially opens up a move towards the 1.0630 level. Resistance remains back at the highs last week at 1.0945.     GBP/USD – currently holding above the support at the August lows at 1.2545, after last week's failure to push above the 1.2750 area. We need to push back through the 1.2800 area to diminish downside risk or risk a move towards 1.2400, on a break below 1.2530.         EUR/GBP – the bias remains for a move back towards the August lows at 0.8500, while below the 0.8620/30 area, where we failed last week. We also have resistance at the 50-day SMA, and while below that the bias remains to sell into rallies.     USD/JPY – having found support at the 144.50 area on Friday, the bias remains for a return to the 147.50 area. A break above 147.50 targets a move towards 150.00. Below support at 144.50 targets a move back towards 142.00.     FTSE100 is expected to open 22 points lower at 7,430     DAX is expected to open 34 points lower at 15,790     CAC40 is expected to open 12 points lower at 7,267  

05:40BST Wednesday 6th September 2023 Higher yields set to weigh on European open   By Michael Hewson (Chief Market Analyst at CMC Markets UK)     European markets fell for the second successive day yesterday, as weak services PMIs for August, along with concerns over sticky inflation briefly pushed the FTSE100 and DAX to one-month lows. With oil prices jumping to their highest levels since November after OPEC+ extended their production cuts into the end of the year, there is increasing concern that the rise in oil prices that we've seen since June, will put a base under the recent slowdown in prices, and keep inflation at elevated levels for longer.   This fear is being reflected in a sharp rise in bond yields on both UK gilts and US treasuries yesterday, with the US dollar also rising to 6-month highs. The rise in yields and oil prices also serves to complicate the challenge facing central banks in their battle to bear down on inflation and drive it back towards their 2% target rate. The rise in yields also pushed US markets lower on the day and looks set to translate into a lower European open.     Now that the malaise that has affected the manufacturing sector for all this year has spread to the services sector, the US economy appears to be setting itself apart from the rest of the world, with today's services data expected to show a more resilient consumer. Both the August PMI and ISM numbers are expected to show that the sector is in expansion territory at 51.2 and 52.5, respectively. Before that we get the latest German factory orders for July which are expected to see decline of -4.3% while EU retail sales are expected to decline by -0.2%. The latest UK construction PMI for August is also set to slip into contraction territory from 51.7 in July to 49.8.   Yesterday the RBA kept rates unchanged at 4.10% signalling little indication that rates would be going lower in the near future. The central bank was insistent that inflation remains too high, and that it will take until late 2025 for prices to return to the 2-3% target range.     Today, attention shifts towards the Bank of Canada, and the likelihood that they will do the same as the RBA in leaving rates unchanged as well as keeping their options open for the rest of the year. Since the Bank of Canada last raised rates back in June, the headline rate has remained at 5%. At the last set of jobs numbers, the Canadian economy saw a net decline of -6.4k jobs, with most of those jobs lost being part-time in nature.     The unemployment rate edged up to 5.5% and to its highest level since January 2022. With wage growth at 5% and the economy growing at 0.3% in June the increase in rates does appear to be slowly acting as a brake on the Canadian economy with consumer spending slowing to stall speed over the last couple of months.     With the central bank saying that inflation is unlikely to return to target until 2025, no changes are expected today with rates staying at 5%.     EUR/USD – slipped below the August lows at the 1.0760/70 area sliding below trend line from the March lows, the break of 1.0750 area opening a move towards the 1.0630 level. Resistance remains back at the highs last week at 1.0945.     GBP/USD – slipped below the August lows at 1.2545, opening the risk of a move towards the 200-day SMA just above the 1.2400 area. For this to unfold we need to see a move below the 1.2520/30 area. Resistance at last week's highs at 1.2750.         EUR/GBP – continues to drift lower, despite a brief move to the 0.8570/80 area. The bias remains for a move back towards the August lows at 0.8500, while below the 0.8620/30 area.     USD/JPY – remains on course for the 150.00 area, having moved above the 147.50 area yesterday. Only a move below last week's low at 144.50 targets a move back towards 142.00.     FTSE100 is expected to open 26 points lower at 7,412     DAX is expected to open 28 points lower at 15,743     CAC40 is expected to open 26 points lower at 7,228

GBP: Look out for BoE Governor Andrew Bailey at 3:15 pm CET Sterling is coming under pressure against the strong dollar and marginally outperforming the pressured euro. High wage growth looks to be the primary reason for the market retaining expectations of a further 57bp of Bank of England (BoE) tightening in this cycle – making pivotal next Wednesday's release of the average earnings figures for July. Our base case is one more 25bp hike from the Bank on 21 September and then a prolonged pause. The manufacturing slump in the eurozone and these high energy prices suggest EUR/GBP can trade at the lower end of that 0.8500-0.8600 range into that BoE rate meeting on 21 September. GBP/USD looks more vulnerable to a firm test of 1.2500 psychological support.  

Lower open expected, China trade sees modest improvement   By Michael Hewson (Chief Market Analyst at CMC Markets UK) European markets declined for the 4th day in a row yesterday with both the DAX and FTSE100 falling to one-week lows on concerns over slowing economic activity, against a backdrop of rapidly rising oil prices which could act as a long-term headwind for central banks. The initial catalyst was a truly dreadful German factory orders number for July which saw output plunge by -11.7%, the biggest fall since April 2020. When combined with the recent manufacturing and services PMI numbers, which showed further deterioration.     The weakness in European markets also weighed on US markets, which came under additional pressure for an entirely different reason after the latest ISM services report saw economic activity rise to its highest level since February, while prices paid jumped to their highest levels since April, pushing both the US dollar and yields higher, on expectations that even if the Fed pauses this month, we could still see another rate hike in November. Last night's Beige Book showed the US economy grew at a modest rate through July and August, with consumer spending stronger than expected, while today's weekly jobless claims are set to remain steady at 230k.     Earlier this morning we got another snapshot of the Chinese economy, with the latest trade numbers for August. Over the past few weeks China has taken several measures to help boost the prospects for its economy and has continued to do so on a piecemeal basis. From easing overseas travel restrictions to modest cuts to lending rates, recent PMIs have shown that these have had limited success. In July, the economy slipped into deflation after headline CPI fell from 0.2% in June to -0.3%. PPI, which has been in deflation since the end of last year improved slightly but still declined by -4.4%, with the latest inflation numbers for August due this weekend.     This morning's trade numbers for August did show an improvement on the July figures but given how poor these were it was a low bar. Imports declined by -8.8%, an improvement on the -12.4% decline in July, while exports fell -7.3%, which was a significant improvement on the -14.5% seen in July. While this is encouraging, demand for Chinese goods was still weak from an international, as well as domestic perspective. The pound was the worst performer yesterday after Bank of England governor Andrew Bailey gave every indication that the Bank of England might have concerns over further tightening measures, given worries about transmission lags. With Deputy Governor Ben Broadbent and Chief economist Huw Pill also indicating that they think monetary policy is already restrictive enough, the markets could be being lined up for a pause later this month.     With Asia markets also slipping back, European markets look set to open lower, with German industrial production data for July set to show similar weakness as factory orders yesterday, albeit with a more modest decline of -0.4%.      EUR/USD – this week's slide below the August lows has seen the euro slip lower with the May lows at 1.0635 the next target. Resistance now comes in at the 1.0780 area, and behind that at the 1.0945/50.     GBP/USD – remains under pressure with the 200-day SMA the next target at the 1.2400 area. Only a move back above the 1.2630/40 area, and behind that the highs last week at 1.2750/60.         EUR/GBP – squeezed back to the 50-day SMA having found a short-term base at 0.8520 area. We have resistance at the 0.8570/80 area, as well as the 0.8620/30 area.     USD/JPY – remains on course for the 150.00 area, despite a brief sell-off to 147.00 yesterday. Only a move below last week's low at 144.50 targets a move back towards 142.00.     FTSE100 is expected to open 18 points lower at 7,408     DAX is expected to open 45 points lower at 15,696     CAC40 is expected to open 19 points lower at 7,175

GBP: BoE dovish comments hit the pound EUR/GBP has experienced a good rally in the past two sessions, now trading at around 0.8580 on the back of dovish comments by Bank of England members. Yesterday, BoE Governor Andrew Bailey stressed the downside potential of UK inflation and said that rates were likely near the top of the cycle. He was joined by two other MPC members at the Parliament testimony, Jon Cunliffe and Swati Dhingra, who also stressed inflation is at a turning point and gave few reasons to suggest multiple more hikes are on their way. It appears that the BoE may be transitioning to a higher-for-longer narrative. Markets are now for the first time starting to cast some doubts about whether the BoE will hike rates at all at the 21 September meeting, with pricing having dropped below 20bp after yesterday’s Parliament testimony. For now, our base case is that they will go ahead with a hike but that it will be the last one, meaning markets will have to price out the additional hike still priced for later this year. EUR/GBP upside potential remains decent in our view. Today, keep an eye on the BoE decision-making panel survey and on any evidence of abating inflationary pressure.

Economy concerns weigh on Europe, as higher rates keep US markets on the back foot By Michael Hewson (Chief Market Analyst at CMC Markets UK)     Yesterday was another mixed bag for European markets, with the DAX closing lower for the 5th day in a row, while still closing well off the lows of the day in another choppy session.  The FTSE100, on the other hand, managed to break a 3-day losing streak, helped by a slightly weaker pound. US markets had a slightly more negative tone to them with the Nasdaq 100 closing lower for the 4th day in a row, with weakness in the Apple share price acting as the main lag on the index, while weekly jobless claims fell to their lowest levels since February.       The overall mood amongst investors does appear to be becoming gloomier, however despite recent price moves we're still within the price ranges we've been in over the past 6 months. With some key central bank meetings looming in the next 2 weeks we might find the catalyst that breaks us out of these choppy ranges. It's been another strong week for the US dollar, set for an eight successive weekly gain, and its highest level in over 6 months as it recovers back to the levels it was just prior to the March regional banking crisis.     One of the main reasons why the US dollar is doing so well is largely down to the performance of the US economy relative to its peers. Recent economic data has shown that the economy remains resilient, so much so that there is a feeling that the Federal Reserve might be able to get away with one more rate hike before year end, probably in November.       The same cannot be said anywhere else with weakness in China, Europe and the UK holding back any prospect of further rate hikes against a backdrop of a deteriorating economic outlook, This change in sentiment has seen the pound and the euro slide back, with the euro slipping below 1.0700 for the first time since June, along with the pound which has slipped below 1.2500. The economic data seen this week, especially from Germany and the rest of the euro area has been extremely disappointing, from some dreadful factory orders data for July, to a sharp downgrade to EU Q2 GDP from 0.3% to 0.1%, which meant that since Q3 of last year the euro area has barely grown at all.     It would take a brave central bank to hike rates further when economic activity is collapsing in one the biggest economies in Europe.   The weakness in the pound has been much more notable as traders pare bets on the likelihood of the Bank of England hiking rates by as much as expected over the coming weeks and months. Judging by recent comments from the likes Governor Bailey earlier this week, as well as deputy governor Broadbent and chief economist Huw Pill at the end of August, there is a sense the market is being softened up for a rate pause later this month, with the narrative likely to be that rates are likely to stay at current levels until 2025 at the very least.     This in turn has seen gilt yields slide across the board, as future rate hike bets get priced out, and investors turn their attention to which central bank might have to cut rates first, with opinion split between the ECB, or the Bank of England.   On the data front it's set to be fairly quiet day, with little way of data on the docket, as we look towards a modestly cautious, but positive European open.   EUR/USD – slipped below the 1.0700 area yesterday, with the May lows at 1.0635 the next key support. Resistance comes in at the 1.0760/70 and the August lows.     GBP/USD – closing in on the 200-day SMA at the 1.2410 area. Below 1.2390 argues for a move towards the 1.2300 area. Only a move back above the 1.2630/40 area, stabilises and argues for a return to the highs last week at 1.2750/60.         EUR/GBP – squeezed back to the 0.8600 area breaking above the 50-day SMA in the process. The 100-day SMA and 0.8620/30 area is also a key resistance. Support lies back at the lows this week at 0.8520.     USD/JPY – had 3 attempts at the 147.80/90 area this week and failed. A break above 148.00 targets the 150.00 area. Only a move below last week's low at 144.50 targets a move back towards 142.00.     FTSE100 is expected to open 7 points lower at 7,434     DAX is expected to open 12 points higher at 15,730     CAC40 is expected to open 5 points higher at 7,201  

GBP: Data check this week The pound emerges from a difficult week where the dovish rhetoric ahead of future Bank of England decisions consolidated and markets continued to scale back tightening expectations. It must be noted that the largest contributor to the dovish re-pricing in the GBP curve has been the BoE’s own communication, which seemed to shift more in favour of a higher-for-longer rather than a higher peak. One bit of data that endorsed the dovish narrative came from the BoE’s Decision Maker Panel survey, which showed a widespread decline in inflationary pressure. But the BoE has made clear that it’s hard data that matters, and this week’s UK calendar will be quite helpful in that sense. Wage and jobs data will be the key release tomorrow. Private sector wage growth currently stands at 8.2% and looks likely to remain unchanged, but there’s an outside risk that we see this nudge slightly lower. The unemployment rate may also nudge a bit higher. All that may fail to invert the dovish trend on UK rate expectations ahead of next week’s Bank of England’s policy meeting, although the pricing has already dropped quite substantially (16bp priced in for September, 35bp to a peak). Our economics team still thinks the BoE will go ahead with a hike this month. Inflation figures are out one day before the meeting, so while more GBP weakness is possible around this week’s data releases, next week could see some recovery. EUR/GBP may be trading well above 0.8600 once we get to the BoE meeting.

GBP: Wage data not as hawkish as it looks The UK has just released wage and employment data. On the face of it, an as-expected 7.8% three-month/year-on-year rise in ex-bonus weekly earnings in July makes the case for the Bank of England to remain hawkish. But here is what our UK economist, James Smith, thinks of the data.    The UK wage numbers are actually more dovish than they look at first glance. At the headline level, regular pay growth stayed at 7.8% on a 3M/YoY basis- - no surprises there. But drill down and if you strip out the public sector, private sector pay barely increased in level terms between June and July. And if we look at the altnerative wage measure based on payrolls, that actually fell in level terms for the second consecutive month. It is only one data point, admittedly, and several upside surprises preceded it. But with unemployment notching higher, the labour market data doesn't scream a need to keep hiking rates much further. We think it right not to chase EUR/GBP too much lower on this data (it is currently reversing from a brief dip to 0.8570) and what could prove a mildly hawkish ECB on Thursday warns of EUR/GBP breaking above 0.8600 later this week.

GBP: Rolling lower As we discussed in yesterday's FX Daily, the market did read the latest wage developments slightly dovishly and re-priced both the Bank of England tightening cycle and sterling lower. It is quite incredible to see the Bank Rate now priced just above 5.50% next February. This terminal rate had been priced close to 6.50% just a few months ago. If we are right with our call for an ECB rate hike tomorrow, EUR/GBP could edge up towards the 0.8670 area. And given that we like a continued strong dollar in the short term, expect GBP/USD to press the 200-day moving average at 1.2430. Recall that based on speculative positioning data, both the euro and sterling look the most vulnerable to further dollar strength.

GBP Rolling lower As we discussed in yesterday's FX Daily, the market did read the latest wage developments slightly dovishly and re-priced both the Bank of England tightening cycle and sterling lower. It is quite incredible to see the Bank Rate now priced just above 5.50% next February. This terminal rate had been priced close to 6.50% just a few months ago. If we are right with our call for an ECB rate hike tomorrow, EUR/GBP could edge up towards the 0.8670 area. And given that we like a continued strong dollar in the short term, expect GBP/USD to press the 200-day moving average at 1.2430. Recall that based on speculative positioning data, both the euro and sterling look the most vulnerable to further dollar strength. Chris Turner    

GBP: Paring back of BoE hike expectations encouraging reversal of GBP gains The pound has continued to trade at weaker levels overnight after selling off yesterday following the release of the latest labour market report from the UK. It has resulted in EUR/GBP rising back above the 0.8600-level while cable is continuing to hold just above support from the 200-day moving average that comes in at around 1.2430. The pound has been undermined recently by the paring back of BoE rate hike expectations as we highlighted in our latest FX Weekly report (click here). The UK rate market has become less confident that the BoE will deliver multiple further rate hikes in the current tightening cycle. There are 19bps of hikes priced in for next week’s MPC meeting and 39bps of hikes by February of next year. It implies that the UK rate market is currently attaching around a 50:50 probability to the BoE delivering one final hike after next week’s 25bp hike which is viewed as almost a one deal. The main trigger for the paring back of BoE rate hike expectations have been comments from BoE officials including Governor Bailey and Chief Economist Pill who have signalled that the rate hike cycle is close to an end and that keeping rates higher for longer is preferred to the alternative of hiking rates further towards 6.00%. Next week’s updated forward guidance from the MPC meeting will be important in determining whether the BoE plans to deliver one final hike or is becoming more confident that it has raised rates enough   At the same time the recent data flow from the UK is helping to dampen BoE rate hike expectations as well. While yesterday’s labour market report did show average weekly earnings hitting a new high of 8.5% in July, the details of the report provided more encouragement that labour demand continues to weaken and wage growth is beginning to slow. Employment dropped by 207k and the unemployment rate ticked up further to 4.3% as it moved further above the cycle low of 3.5% from las August. Back in the August MPR the BoE had forecast the unemployment rate would rise to only 4.4% by the end of next year. Job vacancies also continued to fall and moved below 1 million. After stripping out more volatile bonuses, regular pay growth in the private sector has slowed in recent months coming. The HMRC’s median pay measure even declined by -0.5%M/M suggesting the peak has been reached for pay growth.   Furthermore, it has just been revealed that services sector growth was much weaker than expected at the start of Q3. After expanding by 0.5%M/M in June, service sector output contracted by -0.5% in July. It has reinforced the pound’s downward momentum  

GBP: ECB helped BoE expectations stay low Sterling followed the euro lower against a backdrop of broad-based dollar strengthening yesterday, and Cable has heavily tested the 1.2400 support in the past 24 hours. The dovish tilt by the ECB likely added fuel to the ongoing dovish re-pricing of Bank of England rate expectations, and markets now price in only 34bp to a peak, a 40bp correction over the past month.   EUR/GBP moved back below the 0.8600 level after the ECB dovish hike, and may stay under some mild pressure into the BoE, but looks more likely to struggle finding much direction in the near term. This morning, the BoE will release a 12-month-ahead inflation expectation survey, which came in at 3.5% last month, although it is not likely to move the market substantially. Both investors and policymakers will still get the chance to look at a CPI print (on Wednesday) before the BoE announcement (on Thursday), which has a good chance of tilting market pricing.

Why the Bank of England might not raise rates on Thursday We're expecting one final rate hike from the Bank of England this week with wage growth and inflation both proving stubborn. But recent comments show the Bank is laying the ground for a pause, and we aren’t ruling that out on Thursday.   Investors have pared back BoE hike expectations Investor expectations for the Bank of England have come a long way since the start of July. Back then markets were pricing four more rate hikes, in addition to the one in August. Now it’s less than two, and investors are toying with the idea of a pause from the Bank of England on Thursday. Investors are pricing a 20% chance of a ‘no change’ decision, and that follows a series of comments from BoE officials that appear to be laying the ground for a pause. The Bank has made it abundantly clear that it thinks keeping rates elevated for a long period of time is now more important than how high they peak. Back in August, the BoE included a new line in its policy statement, saying that rates needed to stay “sufficiently high for sufficiently long”. The Bank is now also formally describing policy as "restrictive". That may be a statement of the obvious with rates above 5%, but it’s nevertheless significant that policymakers are now making a point of saying this.  To hammer home the message, Chief Economist Huw Pill said recently that he'd prefer a 'Table Mountain' profile for rates over a 'Matterhorn', or in other words a steadier path with a long period of no change, over a sharper pace of rate hikes and a swifter descent from the peak.   Markets have lowered expectations for peak Bank Rate   Could we get a pause on Thursday? This is a simple reflection of the UK mortgage market, where roughly 85% of lending is fixed, albeit for a relatively short amount of time. The average rate being paid on outstanding mortgages has risen from 2% to 3% so far, and we expect that to rise above 4% next year even if the BoE doesn’t hike rates any further. That's why the Bank is making it its mission to convince investors that rates need to stay high for a long time, and any further rate hikes should be seen as a tool to meeting this end. It does feel like the Bank is actively trying to set the stage for a pause. Could that happen this week? We wouldn’t totally rule it out. Policymakers will have had a keen eye on the Federal Reserve, which has succeeded in pushing back rate cut expectations with the so-called “skip strategy”. By drawing out its tightening cycle by pausing at every other meeting, the Fed has managed to keep the conversation about how many hikes we have left, rather than how long it will take before we get rate cuts. A similar strategy, whereby the BoE pauses in September but hints strongly that it could hike again in November, could be tempting for policymakers this week.     Our base case is one more rate hike None of that is our base case though, and we’re expecting one final hike on Thursday. The reality is that both wage growth and services inflation, the two key metrics upon which the BoE is basing policy, are higher than forecast back in August. We also still have one round of CPI data due the day before the meeting, and we expect services inflation to nudge slightly higher again.  Still, look closely enough and there are signs that wage growth may be starting to ease. The jobs market is clearly cooling now too, while a range of surveys suggest that fewer firms are raising prices, not least because lower energy prices are taking pressure off service sector costs. We expect this to show more readily in the services CPI numbers over the next few months. That means the Bank can probably afford to end its tightening cycle this week. Assuming though that the fall in services inflation and wage growth is pretty gradual, we think a rate cut is unlikely until at least the second quarter of next year.   Services inflation should start to come down later this year   Expect a faster pace of quantitative tightening (QT) The other decision the Bank will be making this week is on quantitative tightening as it decides whether to ramp up the pace over the next 12 months. The stock of gilts due to mature over the next year is roughly £10bn higher than over the last. The Bank has also completed its unwind of corporate bonds over the past year, and the implication is that it might boost gilt sales over the next 12 months to compensate. We therefore think the Bank will plan to reduce its gilt holdings by roughly £100bn over the next 12 months, up from £80bn over the last.   GBP: Biggest FX reaction comes on a pause On a trade-weighted basis, sterling has had a good year. It is still up over 5% year-to-date, although is now around 2% off the highs seen in July. Driving a large portion of that trend has been expected Bank of England rate policy. Most notably the recent repricing in the BoE terminal rate towards the 5.60% area from a peak near 6.50% has explained a large part of sterling's softness over the last couple of months. As policy tightening cycles in the G10 (ex-Japan) policy space reach their conclusions, one could argue that 8-10bp adjustments in money market curves will contribute only noise not trend to FX markets. And certainly, an as-expected 25bp BoE rate hike Thursday amid some hawkish rhetoric looks unlikely to be a game-changer for sterling.  That said, a surprise pause would have a big impact on sterling. And while the BoE may try to market a pause like a Fed 'skip', the market would doubt that the BoE would be in a position to raise rates later in the year. The FX options market prices a 95bp GBP/USD range for the 24-hour event risk covering the Fed and BoE meetings this week. A BoE pause could well push cable below the May lows just above 1.2300.  Perhaps surprising to some has been sterling underperforming the euro too - despite very poor eurozone confidence figures and the European Central Bank pointing to the end of the tightening cycle. Again this looks largely down to the greater downside for expected UK interest rates - a factor which should weigh on sterling into 2024. Our year-end 2023 EUR/GBP forecast remains 0.8800.    

GBP: Most of the short-term repricing is done It was not our baseline view, but we did warn that EUR/GBP could hit 0.8700 yesterday if the Bank of England paused, and that is what happened. As our UK economist, James Smith, discusses in his BoE review comment, we think the terminal rate has been reached now at 5.25%. However, given that it was such a close vote yesterday (5-4) there is still a chance of one final hike at the 2 November BoE meeting. This means that the market pricing of around a 50% chance of one last hike may largely stay with us until that meeting. Pricing of the BoE curve has been a big driver of sterling this year and we suspect EUR/GBP can now drift in a 0.86-0.87 range into that meeting. A leg higher to 0.88/89 probably requires some news of a serious UK slowdown and the market moving on to pricing the 2024 easing cycle. GBP/USD is another matter, however. If EUR/USD trades down to 1.05, GBP/USD could be trading near 1.21.

Lower open expected for European markets By Michael Hewson (Chief Market Analyst at CMC Markets UK)     Last week the FTSE100 pushed up to its best level since late May before finishing the week slightly lower. Unlike its peers in the US and in Europe the FTSE100 is on course to finish the month higher, while the Nasdaq 100, S&P500 and DAX all look set to close out the month lower.     US markets have looked particularly vulnerable after last week's hawkish Fed meeting saw the US central bank revised up its Fed Funds target rate for 2024 to 5.1% from 4.6%, as a more resilient US economy reinforced the higher for longer mantra, which in turn served to push US 2-year yields to their highest levels since 2006 and 10-year yields to their highest levels since 2007.       The Fed also kept the prospect of another rate hike in November very much on the table with Governor Michelle Bowman and Susan Collins of the Boston Fed reinforcing that messaging over the weekend.     German and French yields have also pushed higher in the last 2 weeks in the wake of the ECB's surprise decision to hike rates by 25bps despite increasing evidence that the economy in Europe is struggling significantly. Unsurprisingly this decision weighed on markets in Europe which slid back sharply last week.    We also saw the S&P500 close at its lowest level since 9th June at the end of last week, as well as closing below its 100-day SMA for the first time since March. The Nasdaq 100 also finished the week below its 100-day SMA for the first time since 19th January in a sign that the upward momentum that has been the hallmark of the US markets' resilience may be starting to break down.     The outperformance of the FTSE100, which has struggled to push higher this year, can partly be explained by the fact that the Bank of England is probably done when it comes to raising rates, after last week's finely balanced decision to call a pause to the current rate hiking cycle. This realisation that additional rate hikes could do more harm than good in the face of a squeezed consumer has seen UK gilt yields plunge in the last 2-weeks with the UK 2-year yield slipping to its lowest since mid-June and offering some welcome relief to mortgage holders and the banks and real estate sector in the process.   This weakness in yields has unsurprisingly hurt the pound which looks set to be the worst performing G8 currency this month and on course for its biggest monthly decline since August last year.     The extent of this weakness particularly against the euro seems a little overdone given the weakness in the European economy could force the ECB into a rate cut sooner than perhaps it would like given the dire performance being seen in some of the recent PMI numbers.     The problem facing all the central banks is the rise in the oil price which if it continues unchecked could choke off any semblance of a rebound in economic activity. With Brent crude prices at 10-month highs and core inflation still uncomfortably high the price for keeping a lid on inflation could well see current interest rate levels remain higher for a lot longer. This is especially true in the UK, where while we may have averted the worst of what markets were pricing for UK rates, when the terminal rate was being priced at 6%, we could find that it could be a very long time before rates come down even a little.     Nonetheless stock markets do appear to be pricing in the very real prospect of a prolonged period of low growth, and high inflation, or stagflation and even possibly recession. Recent economic data is already flashing warning signs to this effect with this morning's German IFO data for September set to reinforce this with further weakness towards last years low point of 85.2 expected in the business climate number. Current assessment is set to also weaken further towards August 2020 levels of economic activity. This week's inflation data is expected to underpin the challenges facing central banks with the latest numbers from Australia, as well as core PCE \Deflator from the US as well as the latest flash CPI numbers for September from France, Germany, Spain as well as the wider EU flash number which is due on Friday, and which could show the ECB erred a couple of weeks ago when it tightened the rate hike screw further.     European markets look set to open lower this morning after the weak finish seen on Friday in the US.      EUR/USD – currently finding some support at the 1.0615 area, with a break below 1.0600 retargeting a return to the March lows at 1.0515. We did see a rebound to the 1.0740 area last week but we need to see a move back above 1.0780 to stabilise and minimise the risk of further losses to the lows this year at 1.0480.   GBP/USD – has slipped below the May lows at 1.2295 and could well sink further towards the 1.2190 area on the way to a retest of the 1.2000 area. Only a move back above the 1.2430 area and 200-day SMA stabilises and argues for a return to the 1.2600 area.       EUR/GBP – currently retesting the 200-day SMA at 0.8720, with a break above this key resistance arguing for a move back to the 0.8800 area. Support at the 0.8670 area.   USD/JPY – continues to squeeze higher towards the 150.00 area with support currently at the lows last week at 147.20/30. Major support currently at the 146.00 area.   FTSE100 is expected to open 21 points lower at 7,662   DAX is expected to open 30 points lower at 15,527   CAC40 is expected to open 22 points lower at 7,162 Email

05:40BST Tuesday 26th September 2023 Asia weakness set to see lower European open By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets got off to a poor start to the week yesterday as concerns around sticky inflation, and low growth (stagflation), or recession served to push yields higher, pushing the DAX to its lowest levels since late March, pushing both it and the CAC 40 below the important technical level of the 200-day SMA. Recent economic data is already flashing warning signs over possible stagnation, especially in Europe while US data is proving to be more resilient.   Worries over the property sector in China didn't help sentiment yesterday after it emerged Chinese property group Evergrande said it was struggling to organise a process to restructure its debt, prompting weakness in basic resources. The increase in yields manifested itself in German and French 10-year yields, both of which rose to their highest levels in 12 years, with the DAX feeling the pressure along with the CAC 40, while the FTSE100 slipped to a one week low.   US markets initially opened lower in the face of a similar rise in yields with the S&P500 opening at a 3-month low, as US 10-year yields continued to push to fresh 16-year highs above 4.5%. These initial losses didn't last as US stocks closed higher for the first time in 5 days. The US dollar also made new highs for the year, rising to its best level since 30th November last year as traders bet that the Federal Reserve will keep rates higher for much longer than its counterparts due to the greater resilience of the US economy. The focus this week is on the latest inflation figures from Australia, as well as the core PCE Deflator from the US, as well as the latest flash CPI numbers for September from France, Germany, Spain as well as the wider EU flash number which is due on Friday. This could show the ECB erred a couple of weeks ago when it tightened the rate hike screw further to a record high.   On the data front today the focus will be on US consumer confidence for September, after the sharp fall from July's 117.00 to August's 106.10. Expectations are for a more modest slowdown to 105.50 on the back of the continued rise in gasoline prices which has taken place since the June lows. The late rebound in US markets doesn't look set to translate into today's European open with Asia markets also sliding back on the same combination of stagflation concerns and reports that Chinese property company Evergrande missed a debt payment.   Another warning from ratings agency Moody's about the impact of another government shutdown on the US economy, and its credit rating, didn't help the overall mood, while Minneapolis Fed President Neel Kashkari said he expects another Fed rate rise before the end of the year helping to further boost the US dollar as well as yields.     EUR/USD – slid below the 1.0600 level yesterday potentially opening the prospect of further losses towards the March lows at 1.0515. Currently have resistance at 1.0740, which we need to get above to stabilise and minimise the risk of further weakness.      GBP/USD – slipped to the 1.2190 area, and has since rebounded, however the bias remains for a retest of the 1.2000 area. Only a move back above the 1.2430 area and 200-day SMA stabilises and argues for a return to the 1.2600 area.       EUR/GBP – currently have resistance at the 200-day SMA at 0.8720, which is capping the upside. A break here targets the 0.8800 area, however while below the bias remains for a pullback. If we slip below the 0.8660 area, we could see a move back to the 0.8620 area.     USD/JPY – has continued to climb higher towards the 150.00 area with support currently at the lows last week at 147.20/30. Major support currently at the 146.00 area.     FTSE100 is expected to open at 7,624     DAX is expected to open at 15,405     CAC40 is expected to open at 7,124  

GBP: An expensive sell With one-month implied yields at 5.20%, sterling is an expensive sell. For that reason, we think EUR/GBP may continue to trade in the 0.86-0.87 range for the time being rather than continue to march higher. GBP/USD is a different story where the ongoing strength of the dollar and the softening risk environment warn that little support can be expected before the 1.2000/2075 area. UK-specific inputs are light at the moment. But because last week's Bank of England vote for unchanged policy was so close, the market is reluctant to completely price out the risk of one last rate hike.

EUR: 1.0200 is the outside risk bottom In the article mentioned above, we estimate that an extension of the run in US treasury yields to the 5.0% mark would take EUR/USD to 1.02. That is not our base case, but the ongoing pressure on the euro is clearly not confined to the US rates story. The ongoing re-rating of growth expectations in the eurozone has ultimately come through to the FX market and taking a toll on the common currency. Developments in the US activity story remain much more important, and if signs of weakness emerge across the Atlantic (and markets price in more Fed tightening) we expect a swift turnaround in EUR/USD, but that may not be a story for the near-term. Holding at the key 1.0500 support will be a success for those hoping for that turnaround to happen anytime soon. Today, the eurozone calendar is light until tomorrow’s CPI figures start to come in, and there are no scheduled European Central Bank (ECB) speakers after Austrian hawk Robert Holzmann said it was unclear whether the peak in rates had been reached yesterday. Across the British channel, the economic calendar is also looking empty today, with no scheduled central bank speakers. We continue to flag downside risks to the 1.2000 area in Cable, while EUR/GBP may struggle to hold on to recent gains as sterling’s recent underperformance relative to the euro starts to look a bit overdone now that the big bulk of the Bank of England repricing has happened.

Firmer yields continue to weigh on equity markets By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets underwent another negative session yesterday, with the DAX and CAC 40 slipping to their lowest levels in 6-months, as firmer yields and stagflation concerns kept markets on the back foot. We could also be seeing the result of technical effects after both the French and German benchmarks fell below their respective 200-day SMA's earlier this week.     US markets also slipped back with the S&P500 and Nasdaq 100 closing at their lowest levels since early June, after US consumer confidence slowed more than expected in September, and new home sales slipped to a 5-month low.     This weakness looks set to continue this morning with another soft start for European markets, with Asia markets also on the back foot.  Yields on US treasuries have continued to push higher, with a $48bn 2-year treasury auction achieving its highest yield since 2006, while the US dollar index closed at its highest level since November last year.   The rise in the US dollar, along with yields appears to speak to an expectation that sticky inflation will be sustained, keeping rates higher for longer, particularly since oil and gasoline prices appear to be showing little sign of drifting back from their recent highs.    The rise in the US dollar is also causing problems for the Bank of Japan after Japanese finance minister Suzuki said that he viewed recent currency moves on the currency with a high sense of urgency. Suzuki went on to say that appropriate action would be taken against rapid FX moves. Unfortunately for the Japanese government momentum is in the US dollars favour while the Bank of Japan continues to argue the case for further easing.   The very prospect of stickier US inflation will mean that Fed will err more towards higher US rates for longer which means the line of least resistance is for USD/JPY to move through 150 and on to last year's peak at 152.00, unless the BoJ suddenly reverses course.   The Fed isn't being helped by concerns that the trickledown effect of the ironically named inflation reduction act fiscal stimulus is making the Federal Reserve's job much more difficult in pulling inflation back to target in the coming months.         EUR/USD – remains under pressure with the March lows at 1.0515 the next support, along with the lows this year at 1.0480. Currently have resistance at 1.0740, which we need to get above to stabilise and minimise the risk of further weakness.    GBP/USD – slipped below the 1.2190 area, with the bias remaining for a retest of the 1.2000 area. Only a move back above the 1.2430 area and 200-day SMA stabilises and argues for a return to the 1.2600 area.       EUR/GBP – continues to find resistance at the 200-day SMA at 0.8720, which is capping the upside. A break here targets the 0.8800 area, however while below the bias remains for a pullback. If we slip below the 0.8660 area, we could see a move back to the 0.8620 area.   USD/JPY – continues to creep towards the 150.00 area with support currently at the lows last week at 147.20/30. Major support currently at the 146.00 area.   FTSE100 is expected to open 9 points lower at 7,616   DAX is expected to open 26 points lower at 15,230   CAC40 is expected to open 4 points lower at 7,070

Weekly jobless claims set to tee up tomorrow's US payrolls report By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets stabilised somewhat yesterday, although the FTSE100 slid for the third day in succession due to a sharp slide in commodity prices, which weighed on the big caps of basic resources and energy. There was a respite in the big surge we've seen in bond yields, which retreated from intraday and multiyear highs after the September ADP jobs report saw its weakest monthly job gain since January 2021, of 89k. This stabilisation in yields helped temper the downside for US markets, with the S&P500 rebounding from its 200-day SMA, which has acted as a key support area in the past couple of trading days. The retreat in yields also helped US markets rebound and close higher on the day, breaking a 3-day losing streak, with the biggest decline coming with a 10-point fall in the 2-year yield.     This rebound in US markets has translated into a rebound in Asia markets and looks set to translate into a positive start for European markets this morning as we look ahead to the latest German trade import and export data for August, as well as French industrial and manufacturing production data, all of which are forecast to show weak economic performance for both. German exports are forecast to decline by -0.6%, with imports expected to rise by 0.5%, while in France manufacturing output is expected to decline by 0.4%.     The US dollar fell victim to some modest profit taking, slipping back from 10-month highs as yields declined across the board. The US labour market is set to remain in the spotlight today, as well as tomorrow when we get the September non-farm payrolls report, which after yesterday's slowdown in the ADP numbers, could set the seal on another rate hike in November, or keep markets guessing ahead of next week's CPI report.     Before that, later today we get the latest weekly jobless claims numbers which are expected to show that claims increased slightly from 204k to 210k. Continuing claims are forecast to remain steady at 1.67m.       EUR/USD – the next support remains at the 1.0400 level which is 50% pullback of the 0.9535/1.1275 up move, followed by 1.0200. To stabilise we need to move through 1.0620 for a retest of the 1.0740 area.       GBP/USD – strong rebound yesterday from the 1.2030/40 area with support below that at the 1.1835 area which equates to a 50% retracement of the move from the record lows at 1.0330 to the recent peaks at 1.3145. We need to overcome the 1.2300 area to signal a move back the 1.2430 area and 200-day SMA.        EUR/GBP – still range bound with resistance at the 0.8700 area and resistance at the 200-day SMA at 0.8720, which is capping the upside. A break of 0.8720 targets the 0.8800 area, however while below the bias remains for a move back to the 0.8620 area.     USD/JPY – made a 12-month high of 150.16 earlier this week before plunging to 147.35 on the back of possible intervention from the Bank of Japan. With no confirmation that intervention took place, any further moves higher could be choppy. Below 147.30 signals the top is in.     FTSE100 is expected to open 32 points higher at 7,444     DAX is expected to open 62 points higher at 15,162     CAC40 is expected to open 30 points higher at 7,026  

Yield pressure continues to drag on equity markets By Michael Hewson (Chief Market Analyst at CMC Markets UK)     European markets got off to a poor start to the new quarter and the week yesterday, as higher yields and a stronger US dollar helped to keep investors on the back foot. The FTSE100 had a particularly disappointing day, slipping below last week's low to its lowest level since 13th September, with all sectors sinking into negative territory. We've seen similar price action in Asia markets which have also come under pressure with the Nikkei 225 slipping to 4-month lows, while the RBA kept rates unchanged at 4.1%. This weakness looks set to see markets in Europe continue the negative theme of yesterday and open lower.     The weekend agreement by US lawmakers to fund the government until 17th November, while kicking that problem into the long grass, has merely served to refocus investor attention on the resilience of the US economy. The agreement also shifted the odds towards another rate hike from the Federal Reserve in just under a months' time given that economic activity in the manufacturing sector appears to have bottomed out in the short term.     Yields in US treasuries, as well as UK gilts rose sharply on the day helping to act as a drag on equity markets, with the long end of the curve rising much more sharply as markets looked to price in the prospect of at least one more rate hike from both the Federal Reserve and the Bank of England, as well as the prospect that rates are likely to stay at current levels for some time to come. The rise in the US 10-year yield saw it finish at its highest level in 16 years, while the 30-year yield closed at a 13-year high, as fresh comments from various Fed officials made the case for additional rate hikes, with Fed governor Michelle Bowman remaining hawkish in comments made at a banking conference in Banff yesterday. Cleveland Fed President Loretta Mester adopted a similar view at a local business event. US markets also underwent what can only be described as a choppy session with the Nasdaq 100 managing to put in a strong session driven mainly by strong gains in the big cap giants of Nvidia, Alphabet, Microsoft and Meta Platforms, even as over half the index constituents finished the day in negative territory, while the Russell 2000 finished at a 4-month low, suggesting that for all the bullishness around the other major US indices, confidence at the small business level is slightly more fragile.     This divergence could well become even more apparent if yields as well as the US dollar continue their relentless climb, and the inversion continues to unwind in the most painful of fashions, as long term yields rise sharply.    This was a message that Fed chairman Jay Powell received loud and clear from small business leaders at a roundtable in Pennsylvania yesterday, when he was assailed from all sides over the impact that inflation, high interest rates, and labour shortages were having on their businesses, as well as other challenges facing the US economy, as interest rates reset to more normal levels.     Yesterday's ISM manufacturing survey for September appeared to show that these challenges might be abating, with prices paid slowing and hiring picking up, with this week's various jobs data hoping to reinforce this trend. Today's JOLTS report for August is expected to show that vacancy rates remained steady at 8.83m, unchanged from July as the US labour market continued to show its resilience.          EUR/USD – slipped back towards the 1.0480 lows of last week. A move below 1.0480 has the potential to retarget parity. The main resistance remains back at the 1.0740 area, which we need to get above to stabilise and minimise the risk of further weakness.       GBP/USD – slipped below the lows of last week at 1.2110 keeping the risk very much tilted towards the 1.2000 area, while below resistance at the 1.2300 area in the short term. Only a move back above the 1.2430 area and 200-day SMA stabilises and argues for a return to the 1.2600 area.         EUR/GBP – bias remains lower while below the 0.8700 area and resistance at the 200-day SMA at 0.8720, which is capping the upside. A break of 0.8720 targets the 0.8800 area, however while below the bias remains for a move back to the 0.8620 area.     USD/JPY – bias remains for a move towards the 150.00 area, with a move above the 150.20 area targeting the potential for a move towards last year's peak at 152.00.   FTSE100 is expected to open 24 points lower at 7,486     DAX is expected to open 120 points lower at 15,127   CAC40 is expected to open 50 points lower at 7,018  

Services PMIs in focus as stock markets struggle By Michael Hewson (Chief Market Analyst at CMC Markets UK)   Yesterday saw another day where rising US yields and a strong US dollar continued to exert downward pressure on stock markets with the DAX sinking to a fresh 6-month low, while the FTSE250 fell below its July lows to its lowest levels this year.   US markets also fell back with the S&P500 closing just above its 200-day SMA, as well as at a 4-month low. The Nasdaq 100 also had a poor day after the latest numbers for job openings jumped sharply in August by 600k, while the Dow slipped into negative territory for the year. The sharp rise in long term rates relative to short term rates suggests investors think that US interest rates are likely to remain higher for longer due to the continued resilience of the US economy. Consequently, this bear steepening is slowly unwinding the inversion of the 2/10s from the -105bps we saw at the end of June and where we are now at -35bps. If this trend of rising long-term rates continues, then stock markets could well be in for even more volatility in the days and weeks ahead. Let's not forget 2-year yields are still above 10-year yields, a situation which is far from normal. Under normal circumstances long term rates would be above short-term rates, which means this yield adjustment still has some way to go. How it plays out will be key to how stock markets perform over the next few weeks.     Also weighing on US markets was the voting out of US House speaker Kevin McCarthy, by fellow dissident Republicans on disappointment over the weekend agreement of a deal to avert a US government shutdown until November 17th. With the House now without a majority leader, a new leader will need to be appointed, a time-consuming process if the McCarthy experience is any guide, which could complicate the prospect that we might get a new deal when the current deal expires next month. If you thought UK politics was dysfunctional, then the US runs it a close second.       The weak finish in the US looks set to translate into a weak European open, with Asia markets falling sharply this morning with the focus today on the services sector and the latest US ADP jobs report.     The recent flash PMIs for France, Germany and the UK suggest further economic weakness in the services sector in September. France especially has seen a sharp slowdown despite hosting the Rugby World Cup with the flash services number falling to 43.9 from 46. Germany, on the other hand, saw a modest pickup from 47.3 to 49.8. In the UK we also saw a modest slowdown from 49.5 to 47.2, as concerns about a Q3 contraction across Europe continued to gain strength.       The weak flash readings from France and Germany make it even more puzzling as to why the ECB felt it necessary to raise rates at its last meeting, although one suspects it may well have been its last. In the US the services sector is proving to be more resilient at 50.2, while the ISM services survey has tended to be more resilient and is expected to come in at a fairly solid 53.5. Yesterday the latest JOLTS numbers for August showed a big jump in vacancies to 9.6m in a sign that the US labour market remains surprisingly resilient driving long term US yields to new multiyear highs. Today's ISM as well as ADP payrolls report could add further fuel to that yield fire with another set of strong numbers, ahead of Friday's September payrolls report. ADP payrolls saw 177k jobs added in August, falling slightly short of forecasts of 195k. Slightly offsetting that was sizeable upward revision to July from 324k to 371k, but overall, the main gains have been in services. Expectations are for 150k jobs to be added.        EUR/USD – has slipped below the 1.0480 lows of last week, opening up the potential for a return towards parity, with the next support at 1.0400 which is 50% pullback of the 0.9535/1.1275 up move, followed by 1.0200. The main resistance remains back at the 1.0740 area, which we need to get above to stabilise and minimise the risk of further weakness.       GBP/USD – looks set for a test of the 1.2050 area with a break targeting the 1.1835 area which equates to a 50% retracement of the move from the record lows at 1.0330 to the recent peaks at 1.3145. Only a move back above the 1.2430 area and 200-day SMA stabilises and argues for a return to the 1.2600 area.         EUR/GBP – appears range bound with resistance at the 0.8700 area and resistance at the 200-day SMA at 0.8720, which is capping the upside. A break of 0.8720 targets the 0.8800 area, however while below the bias remains for a move back to the 0.8620 area.     USD/JPY – made a 12-month high of 150.16 yesterday before plunging to 147.35 on the back of possible intervention from the Bank of Japan. With no confirmation at the time of writing that intervention took place, any further moves higher could be choppy. Below 147.30 signals the top is in.     FTSE100 is expected to open 6 points lower at 7,464     DAX is expected to open 33 points lower at 15,052     CAC40 is expected to open 12 points lower at 6,985  

Middle East tensions set to see lower European open US markets finished the week higher after the latest September jobs report showed the US economy added a staggering 336k jobs in September, while August was revised up to 227k, pushing long-term yields sharply higher, and the US-10 year and 30-year yield hitting fresh 16-year highs.   Having spent most of the last few weeks fretting about the prospect of another rate hike and higher rates for longer the thinking now appears to be that a resilient economy and jobs market could mean that companies will be able to deliver better revenues and earnings growth, even with yields at current levels. While that logic comes across as sound on the face of it that rather precludes the idea that rates can't go higher from here. Before the horrific events in Israel over the weekend, the market was pricing in the probable prospect that we may get another 25bps rate hike in November, however what happens if the decline in oil prices that we saw at the end of last week takes another sustained leg higher, if those events morph into a wider crisis across the Middle East?     Consumers may well be resilient now and able to absorb a few more months of rising prices, but the recent pay settlements agreed in recent weeks have yet to feed through into the wage numbers which might mean the US central bank has to raise rates by more than is currently priced.   In a sign that the US consumer is already reaching its limits when it comes to spending on credit cards, US consumer credit for August declined by -$15.6bn, the most in 3 years, against an expectation of an increase of $11.7bn. Some of that decline may be down to the resumption student loan repayments, while auto-loan payments also fell.     That said the events over the weekend and the Hamas atrocities in Israel, and the latter's reaction to them and subsequent declaration of war, have prompted a move into the US dollar, gold as well as a modest bid into bonds, as concerns over escalation risks move to front of mind. With the US Columbus Day holiday likely to keep US trading activity subdued, we expect to see European markets open modestly lower this morning, while oil prices have rebounded from the lows of last week.    For now, the market reaction has been fairly contained as we look towards this week's release of the latest Fed minutes as well as the September CPI report, but attention will never be far from events in Israel given the risk we could escalate further if Iran gets drawn into the fray, which is entirely possible if Israel decides that it bears responsibility for the attack.     EUR/USD – continues to pull away from the lows of last week, with support at the 1.0400 level which is 50% pullback of the 0.9535/1.1275 up move, followed by 1.0200. To stabilise we need to move through 1.0620 for a retest of the 1.0740 area.    GBP/USD – the rebound off the lows last week at the 1.2030/40 area, needs to overcome the 1.2300 area to signal a move back to the 1.2430 area and 200-day SMA. A move below 1.2000 targets the 1.1835 area which equates to a 50% retracement of the move from the record lows at 1.0330 to the recent peaks at 1.3145.       EUR/GBP – still range trading with resistance at the 0.8700 area and resistance at the 200-day SMA at 0.8720, which is capping the upside. A break of 0.8720 targets the 0.8800 area, however while below the bias remains for a move back to the 0.8620 area.   USD/JPY – has managed to hold above the spike lows of last week. With no official confirmation that intervention took place, any further moves back to the 150.16 highs could be choppy. Below 147.30 signals the top is in and a possible move towards 145.00.   FTSE100 is expected to open unchanged at 7,494   DAX is expected to open 71 points lower at 15,158   CAC40 is expected to open 24 points lower at 7,036  

US PCE inflation set to slow further, ahead of the Fed next week By Michael Hewson (Chief Market Analyst at CMC Markets UK) This week a raft of disappointing earnings numbers, and caution over guidance from the likes of Alphabet and Meta Platforms has helped overshadow concerns about an escalation of the conflict in the Middle East between Israel and Hamas. The combination of these two factors has also helped to undermine the previously resilient Nasdaq 100, sending it to its lowest levels since May, although it did find support at its 200-day SMA.     With US markets starting to look slightly more vulnerable to a broader correction and an increasingly uncertain geopolitical backdrop there has been little reason for investors to get overly enthusiastic about looking to get back into the market, instead moving into safer haven type plays like gold, the Swiss franc, and US treasuries. While the Nasdaq 100 fell through its previous lows from September, the S&P500 has looked even more vulnerable, sliding below its 200-day SMA, as well also sliding to 5-month lows.   It's also been another disappointing week for European markets with the DAX on course for its 6th successive weekly decline falling back to levels last seen in March, while the FTSE100 has also struggled for gains these past few days. Against such a backdrop it's therefore somewhat surprising that the US economy continues to look so strong, with last night's impressive Q3 results from Amazon serving to underscore that fact, with the shares rising in after-hours trade.   Q3 revenues comfortably beat expectations at $143.1bn, as did profits which came in at $0.94c a share, or $9.88bn. This included a gain of $1.2bn from its stake in Rivian. There was a strong performance from online stores with net sales of $57.27bn, while AWS saw revenues of $23.06bn which was slightly below expectations of $23.2bn. Operating margin was also better than expected at 7.8%.   For Q4 Amazon expects net sales of $160-167bn, while the company said it is going to hire 250k full and part-time employees to cover the holiday periods of Thanksgiving and Christmas. Amazon also said it expects to see operating income rise to between $7bn and $11bn.   Yesterday's US Q3 GDP numbers were an impressive set of numbers, the best quarterly performance for the US economy since Q4 of 2021, with growth of 4.9%, with a good proportion of that driven by personal consumption of 4%. The strength of these numbers showed the resilience of the US economy, while on the other side of the ledger with respect to core PCE inflation this slowed to 2.4% from 3.7% over the quarter.     Against such a strong economic backdrop the Federal Reserve will be very reluctant to signal that they are done as far as further rate hikes are concerned when they meet next week. Against such a strong set of numbers it was somewhat surprising to see US treasury yields fall back as sharply as they did, however part of the reason for yesterday's slide is perhaps the sense that if the Fed were to hike again, they will wait until December just to ensure another hike is needed, once more data becomes available. Today's core PCE inflation numbers could help inform that thought process further on whether to hike rates again by another 25bps.     With the latest economic projections citing a Fed funds rate of 5.6% by year end and another spike in oil prices exerting further upward pressure on prices, as well as wages, the Fed will want to keep markets thinking that another rate rise is on the table between now and the end of the year.     With a resilient US jobs market and wage growth looking sticky we do appear to be starting to see a split opening up on the FOMC, despite recent data showing that on the Fed's core measure, inflation is easing. The core PCE deflator inflation numbers showed a further easing of inflationary pressure in August, slipping to 3.9% from 4.3%. This is welcome news for those who worry that inflation in the US is proving sticky, with personal spending also slowing to 0.4% from 0.9%.     Today's September numbers are expected to show a further slowdown to 3.7% for PCE core deflator while personal spending is forecast to remain steady at 0.4%.       EUR/USD – slipping back towards the 1.0520 area with the next support at the recent lows at 1.0450. Resistance at the 1.0700 area and 50-day SMA.    GBP/USD – slipped below the 1.2100 area, before rebounding modestly from the 1.2070 area. Major support remains at the October lows just above 1.2030. Below 1.2000 targets the 1.1800 area. Resistance at 1.2300.   EUR/GBP – failed at the 0.8740 area again yesterday. A move below 0.8680 and the 200-day SMA targets the 0.8620 area.   USD/JPY – has pushed above the previous highs at 150.16, making a new high for the year, potentially opening up a move towards 152.20. Support at the lows last week at 148.75.   FTSE100 is expected to open 12 points higher at 7,366   DAX is expected to open 15 points higher at 14,746   CAC40 is expected to open 16 points higher at 6,905

EU GDP expected to stall in Q3 , BOJ tweaks YCC  By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets managed to get off to a positive start to the week yesterday, helped in no small part by the limited and incremental nature of the Israeli incursions into Gaza which appears to be helping assuage concerns that the escalations might prompt another front opening on Israel's northern border with Lebanon and Hezbollah. US markets also got off to a strong start with the Dow posting its biggest one-day gain since July, while the Nasdaq 100 and S&P500 both rose by more than 1%, while oil prices closed at their lowest level in over 2 weeks. While yesterday's rebound was welcome it isn't likely to change the fact that US stocks look set to close their 3rd successive monthly decline.     Yesterday the Japanese yen pushed higher on a report from Nikkei that the Bank of Japan was set to move the bands when it comes to its yield curve control policy. This morning we found out how true that story was when the Bank of Japan, while keeping rates unchanged, did just that, pushing the upper boundary to 1% which was less hawkish than markets had been expecting, given they had already been targeting that level when it came to their bond buying operations.     In moving the band, they have merely removed the discrepancy between the YCC rate and their bond buying levels, disappointing the markets who had been expecting something a little more radical, like pushing the band beyond 1%. In not being more hawkish the Japanese yen tumbled and slid back through the 150.00 level. At the same time, the BoJ raised their inflation forecasts for 2023 to 2.8, and for 2024 to 2.8%.   Despite yesterday's strong US session markets here in Europe look set to open slightly lower as we head into the final trading day of October and look ahead to tomorrow's Federal Reserve rate meeting as well as a tsunami of US economic data this week, we'll also be getting an insight into how the economy in Europe has fared over the last 3 months.     Yesterday we found out that theGerman economy contracted by -0.1% in Q3, while also slipping into disinflation in October, raising the question as to how far behind the rest of Europe might be in that regard.     The French economy is expected to have slowed from 0.5% in Q2 to 0.1% in Q3, with a similar slowdown expected to be seen in the Italian economy, which is also expected to have slowed to 0.1%.   On the wider EU measure the economy is expected to have slowed to 0% in Q3 from 0.1%, meaning that over the last 4 quarters we've seen little to no growth at all. Inflation is also expected to have slowed sharply with French CPI for October expected to have slowed to 4.5% from 5.7% on an annualised basis. EU flash CPI is expected to have similarly slowed from 4.3% to 3.1%, with core prices forecast to remain a little stickier at 4.2%, down from 4.5%.     Given the weakness seen in these figures there is rising concern that the ECB may have erred when it raised rates by another 25bps in September. They certainly ought to offer some pause for thought to the German hawks on the governing council who probably still feel that more needs to be done, when it comes to further rate hikes. In the US we have the latest Chicago PMI as well as October consumer confidence, neither of which are expected to show much in the way of resilience. Consumer confidence is expected to slow to 100.5 from 103, while Chicago PMI is forecast to edge higher to 45, from 44.1.               EUR/USD – continues to rally off the 1.0520 lows of last week, with the next support at the recent lows at 1.0450. Resistance at the 1.0700 area and 50-day SMA.    GBP/USD – continues to rally off the lows of last week at the 1.2070 area last week. Major support remains at the October lows just above 1.2030. Below 1.2000 targets the 1.1800 area. Resistance at 1.2300.   EUR/GBP – retested the 0.8740 area yesterday, before slipping back. We need to see a break above 0.8750 to target the 0.8800 area. A move below 0.8680 and the 200-day SMA targets the 0.8620 area.   USD/JPY – retreated from the 150.78 area at the end of last week, slipping back to the 148.75 area and the lows from 2-weeks ago. Below 148.70 targets the 147.30 area. Still on course for a potential move towards 152.20, while above the 148.75 area.   FTSE100 is expected to open 10 points lower at 7,317   DAX is expected to open 20 points lower at 14,696   CAC40 is expected to open 5 points lower at 6,820  

Fed set to hold rates again with Powell press conference to set the tone  By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European stocks underwent their 3rd successive monthly decline yesterday, despite ending the month on a positive note, with the DAX falling 3.75%, with the FTSE100 also losing 3.75%, and posting its weakest monthly close since October last year US markets also finished lower for the third month in a row, despite a similarly positive finish yesterday, with the S&P500 and Nasdaq 100 both losing more than 2% on concerns about future earnings growth and a possible economic slowdown at a time when rates are expected to remain higher for longer, even as US economic data continues to show little sign of slowing markedly.     It's a different story altogether when it comes to the economic numbers in Europe, where yesterday we saw EU GDP in Q3 slide into contraction territory having seen little to no growth at all in Q1 and Q2.    Inflation across the entire euro area is also showing increasing signs of slowing sharply, calling into question the decision by the ECB to hike rates by 25bps in September in the face of warnings that they could well be overdoing it when it comes to raising rates.   Today's focus shifts back to the US with the penultimate Federal Reserve rate meeting for 2023, as well as the latest ADP payrolls report for October, September job openings numbers, and the latest ISM manufacturing survey.   While the US labour market has held up well this year, we've seen this come against a backdrop of a global manufacturing recession. The last time the ISM manufacturing survey posted a positive reading above 50, was October last year, with expectations that we'll see an unchanged reading of 49. Prices paid is expected to edge higher to 45, from 43.8, while employment is set to slow from 51.2 to 50.9.     Before that we have the latest ADP employment for October which is expected to improve on the surprisingly weak 89k we saw in September, with 150k new positions. Vacancies have been falling over the last few months and are expected to slow again given the rise in the participation rate seen in recent months, with today's JOLTs numbers expected to slow from 9610k to 9400k. Against such a resilient labour market attention will then shift to tonight's Fed meeting.   Having overseen a pause in September the US Federal Reserve looks set to undertake a similar decision today, although they still have one more rate hike in their guidance for this year, which markets now appear to be pricing for December.     Fed chair Jay Powell, in comments made just before the blackout, appeared to indicate that a status quo hold is the most likely outcome at today's meeting, with the key message continuing to be higher for longer. This is certainly being reflected in market pricing especially in the longer dated part of the treasury curve, as the yield curve continues to un-invert.     Most policymakers appear to be of the mind that more time is needed to assess the effects that previous rate hikes have had on the US economy which seems eminently sensible. While the unemployment rate has remained stubbornly low, US consumption patterns have remained resilient while the US economy grew strongly in Q3, however there is this nagging doubt that it could be on the cusp of a sharp slowdown in Q4, and recent payrolls data has shown a large proportion of part time jobs being added.   With US mortgage rates already at 8% there comes a point when further rate increases could destabilise the housing market, as well as increase the pressure further when it comes to tightening financial conditions.   The pound will also be in focus today with the latest house price data from Nationwide expected to show further weakness in house prices in October, with a decline of -0.4% expected.     The latest UK manufacturing PMIs for October is expected to improve from 44.3 to 45.2.               EUR/USD – ran out of steam at the 1.0680 area and 50-day SMA, with support back at the lows of last week at 1.0520, with the next support at the recent lows at 1.0450. Resistance at the 1.0700 area and 50-day SMA.  GBP/USD – rallied to 1.2200 before slipping back with support at the lows of last week at the 1.2070 area last week. Major support remains at the October lows just above 1.2030. Below 1.2000 targets the 1.1800 area. Resistance at 1.2300. EUR/GBP – squeezed up to 0.8755 in a classic bull trap before sliding sharply back. A move below 0.8680 and the 200-day SMA targets the 0.8620 area. USD/JPY – rallied hard from the support at 148.75 and the lows from 2-weeks ago and looks set to retest the highs from last year at 151.95, and the longer term target at 152.20. FTSE100 is expected to open 11 points higher at 7,332 DAX is expected to open 32 points higher at 14,842 CAC40 is expected to open 17 points higher at 6,902

Bank of England set to hold but we could see another split vote  By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets got off to a solid start to the month, helped by weaker economic data, and a slide in yields which raised the prospect that central banks could well be done when it comes to further rate hikes.   Nonetheless after such a poor performance during October there is a sense that what we saw yesterday was nothing more than a relief rally, although it's no less welcome for that.   As expected, the Federal Reserve kept rates unchanged for the second meeting in a row. At the ensuing press conference Fed chairman Jay Powell went on to state that no decisions had been made on whether more rate hikes were coming. He went on to say that while financial conditions had tightened, policymakers weren't confident that policy is sufficiently restrictive, although they had come a long way.     While on the face of it, Powell was trying to come across as hawkish, markets weren't buying it especially since yesterday's economic data showed that the US economy appeared to be slowing. As with anything it's a balancing act for Powell as well as the rest of the FOMC, and with this meeting out of the way the way is now clear for the rest of the committee to show their hands given the sharp fall in bond yields yesterday which indicated that markets feel the Fed is done.   US markets finished the session higher, while the slide in yields which we saw prior to the European close continued in the wake of the Powell press conference and looks set to see European markets carry on that momentum this morning with a higher open.   Today it's the turn of the Bank of England to come to its own decision on whether to raise rates and while we can expect to see a similar decision to hold rates as the Fed yesterday, the nuances of any decision are likely to be starkly different, although we can be fairly confident that the UK central bank is down when it comes to further rate hikes. Having hiked 14 times in a row it seems certain that the bar to further hikes is high, and as such we've seen a switch in narrative that articulates a policy of higher for longer.     There is certainly concern among some of the more hawkish members of the MPC that higher rates are needed, and we can expect the likes of Catherine Mann to push this line. She is likely to be in a minority in the short term if inflation continues to look sticky, however if as expected inflation slows further when the October numbers are released later this month, the prospect of further rate hikes is likely to diminish further.   We need to remember that the energy price cap comes down again in October, and on that comparative alone there should be a sharp drop from where we were a year ago. Sticky wage growth is likely to be a concern for the central bank, however even here there is a sense that this has seen a peak, remaining at 7.8% for the last 3-months, even as headline inflation continues to slow, while next week's Q3 GDP numbers are likely to reinforce concerns about a weaker UK economy.   There ought to be enough evidence today for a majority decision to hold rates, with perhaps one or two of the 4 hawks who voted for a hike in September deciding to uphold the status quo, while downgrading their GDP forecasts.     The most likely to switch to a hold would probably be external members Megan Greene and possibly Jonathan Haskel, although it has been suggested that the lone dove on the MPC, Swati Dhingra could lean towards a rate cut, which really would put the fox in the hen house as far as the pound is concerned. Given how sticky inflation currently is that would be a huge mistake and in all honesty I'm not sure it's necessary when it comes to looking at UK gilt yields which have already fallen quite sharply from their summer peaks. On the economic data front we'll also get to see further evidence that the ECB has overplayed its hand on the rate hike front when we get the latest manufacturing PMI numbers from Spain, Italy, France and Germany, all of which are expected to remain firmly in contraction territory.     Spain is expected to slow to 47, from 47.7, Italy to 46.3, from 46.8, France to slow to 42.6 from 44.2, while Germany is expected to edge higher to 40.7 from 39.6.               EUR/USD – slipped back to the 1.0520 area and last week's lows before rebounding again. We seem to be range bound between the 1.0700 area and the 50-day SMA. Below 1.0520 targets the 1.0450 level   GBP/USD – still trading below trend line resistance from the July peaks which is capping the upside, now at 1.2200. Major support remains at the October lows just above 1.2030. Below 1.2000 targets the 1.1800 area. Resistance at 1.2300.   EUR/GBP – continues to slip towards trend line support from the August lows which is now at 0.8650. A move below 0.8680 targets the 0.8620 area.   USD/JPY – failed just shy of the highs last year at 151.95, sliding back from that key resistance. Still have strong support all the way back at 148.75, with a break above 152.20 targeting a move to 155.00.   FTSE100 is expected to open 33 points higher at 7,375   DAX is expected to open 87 points higher at 15,010   CAC40 is expected to open 40 points higher at 6,972  

GBP: BoE to keep rates high for 'sufficiently long' "Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term" should be the key phrase to look out for in today's Bank of England (BoE) policy statement. The Bank Rate is widely expected to be left unchanged at 5.25%. The focus will also be on the vote split. 6-3 would seem to be the most likely as James Smith explains in our BoE preview.  Assuming that the BoE does not soften its tone today – i.e., it does not provide fresh ammunition to pricing of rate cuts next year – we would expect sterling to stay relatively well supported. This could see GBP/USD push up the 1.2250 area, while EUR/GBP could press support at the 0.8670/80 area.

US payrolls the key test in a strong week for stock markets  By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets saw their best one-day session in 3 weeks, with the DAX closing at a two-week high, helped by a combination of some solid earnings reports, and tumbling yields on growing optimism that central banks have hit peak rates, after the Bank of England followed the Fed in holding rates at current levels. US markets saw a similarly strong session, rising for the 4th day in a row, with the S&P500 rising to a 2-week high, while US 10- and 30-year yields falling more than 25bps in the last 2 days, reinforcing the idea that the rate hike narrative of the last 18 months is now in the rear-view mirror.     Of course, this narrative will still need to be supported by the underlying economic data, and in the case of the US is likely to be subject to two-way risks given the continued resilience of the US labour market.   Today's non-farm payrolls report for October will be the first key test of that narrative in the aftermath of Wednesday's decision by the Federal Reserve to pause for the second meeting in succession, with the goldilocks scenario for markets likely to be one of a softish or neutral report.   Having seen such a strong US close, European markets look set to open higher as we look towards this afternoon's US jobs report.     Before that we get the latest PMI snapshot from the services sector for the UK economy ahead of Q3 GDP numbers which are due next week. Recent data has shown the UK economy is slowing significantly compared to the first half and with manufacturing already in contraction, the services sector is now starting to slow as well, slipping slightly into contraction over the last 3-months we can expect to see further stagnation around 49.2.   After the release of those numbers' attention will shift to the US employment report.   Weekly jobless claims fell back below 200k earlier this month for the first time since January in a sign that the US economy remains reasonably resilient, and although they've ticked up to 217k since then there has been little sign of a slowdown.   In September we saw yet another bumper payroll report with another 336k jobs added, while August was revised up to 227k, which pushed US long term yields higher on the day to new 16-year highs, although we've since slipped back sharply, due to a belief that the Federal Reserve is probably done on the rate hike front.   Wage growth was slightly softer than expected at 4.2%. Another notable factoid was a big jump in part-time positions which rose 151k and could also explain why wage growth showed little sign of racing higher. The unemployment rate remained steady at 3.8%.   This weeks ADP payrolls report for October was another weak one, coming in at 113k, only a modest improvement from the 89k in September, however there has been little to any correlation between the two reports for months now, while vacancies in the US economy have remained high, which suggests little sign that the US economy is starting slow significantly.   One thing that has been notable this year is how every single non-farm payroll report has come in above expectations, and by quite some distance. Will today's numbers be any different?  to note is There is scope for that given that the participation rate has been rising, it was at 62.4% at the start of the year and is now at 62.8%, still 0.5% below the level it was pre-pandemic.   Expectations are for today's October payrolls to come in at 185k, which has been the estimate of choice over the last 3 months.   Most of the new jobs being added have been in services over the last few months and today's ISM services data could well offer further insights into that after the payroll's numbers have been released.   ISM services employment was at 53.4 in September and is expected to rise to 53.5, while prices paid is expected to slow to 56.6 from 58.9. This is where the US labour market is most resilient, and will need to remain so in the lead-up to Christmas.   Amazon has already indicated it will be hiring up to 250 seasonal workers in the lead up to the holiday period. Will it be alone in hiring extra people, when retailers like Target are warning that US shoppers are slowing their spending plans?             EUR/USD – pushed up to the top end of its recent range, and the 1.0675 highs of this week. We continue to be range bound between the 1.0700 area and the 50-day SMA. Below 1.0520 targets the 1.0450 level   GBP/USD – pushed above the 1.2200 area yesterday, but has thus far failed to consolidate that move. Major support remains at the October lows just above 1.2030. Below 1.2000 targets the 1.1800 area. Resistance at 1.2300.   EUR/GBP – finding support at the 0.8680 area for now, with a break targeting the 0.8620 area. We have resistance at the recent highs at 0.8740.   USD/JPY – slipped back to the 149.80 area yesterday, we still have resistance just below the highs of last year at 151.95. Still have strong support all the way back at 148.75, with a break above 152.20 targeting a move to 155.00.   FTSE100 is expected to open 33 points higher at 7,479   DAX is expected to open 79 points higher at 15,222   CAC40 is expected to open 36 points higher at 7,096  

GBP: Not quite the BoE pushback we were expecting Having re-introduced forward guidance last week, we thought the Bank of England (BoE) might have pushed back against market pricing for rate cuts in the second half of 2024. Instead, BoE Chief Economist Huw Pill yesterday said that expectations for rate cuts from next summer looked reasonable. We think these comments are a mild sterling negative and given the risk that Fed-speak puts equities on the back foot again, risk-sensitive sterling could hand back some of its recent gains. For example, EUR/GBP could trade back up to 0.8710/20 and GBP/USD could drop back to 1.2290 perhaps 1.2250. Additionally, Pill's warnings of soft UK CPI releases coming through over the coming months could hold sterling back.

GBP: Softer services inflation rules out BoE December surprise The chances of a Bank of England surprise hike in December were already very low, but this morning’s UK inflation figures for October are further helping a dovish case. Headline inflation dropped from 6.7% to 4.6%, and core from 6.1% to 5.7%: a slightly faster deceleration than consensus in both rates. We know the BoE primarily looks at services inflation, which noticeably undershot the Bank’s forecast (6.9%) by coming in at 6.6%. There are no other CPI releases before the next meeting, so along with the markets sticking to their view for a pause, there may be mounting speculation the BoE might soften its stance towards future policy direction. As we write this report this morning, markets are close to pricing in a first rate cut in the UK in June (23bp). We keep pointing to the fact that pricing in the Sonia curve appears a bit too conservative compared to that of the US and the eurozone in pricing monetary easing and that raises the risk of GBP underperformance as the UK economic outlook deteriorates. The combination of a tentative improvement in eurozone data and soft inflation figures in the UK should help build a floor around 0.8700 in EUR/GBP.

GBP: Softening on the crosses EUR/GBP continues to grind higher - driven we believe by the re-pricing of the Bank of England (BoE) tightening cycle into 2024. Yesterday the market moved to price the first full 25bp BoE cut in June next year and had 78bp of easing priced in by the end of the year. Having switched to forward guidance at the last BoE meeting - keeping restrictive rates for an extended period - the market will now be on the lookout for this language changing. For example, Mexico's central bank, Banxico, recently switched language from 'extended period' to 'some time' presumably forewarning the start of easing in February/March next year. Quite a lot of BoE easing is already priced in for next year, however, meaning it is not certain EUR/GBP has to trade up to 0.8800 just yet. Cable is eating into this week's rally and could dip further unless something like today's US jobless claims disappoint.

A year ago writing for the 2023 G10 FX outlook, we were calling for less trend and more volatility. That worked for the first half of the year before a dollar bull trend took over. Based on our call for Fed easing next year, we now argue that G10 FX markets will be characterised by more trend – a dollar bear trend, that is – and less volatility.   To challenge the dollar, currencies will need a lot of protection A typical financial market response to the start of a Federal Reserve easing cycle would be a bullish steepening of the US yield curve on the prospect of reflationary policy coming through. To speak of ‘reflationary’ policy right now seems criminal – but the Fed has a dual mandate, and if inflation is coming under control through 2024 it can cut rates to ameliorate the impact on the labour force. Bullish steepening of the US yield curve normally favours the commodity currencies, and that's our conviction call in the G10 space. As outlined in our Behavioural Equilibrium Exchange Rate (BEER) model below, the commodity currencies are the most undervalued in the G10 space. Their extreme undervaluation provides some much-needed protection against any continuing dollar strength. Notably, the euro and sterling do not have such protection. Looking across the currency blocs then – after relatively range-bound trading into year-end – we expect the dollar bear trend to pick up a little pace into the second quarter of 2024 as the short-end of the US curve starts to come substantially lower. European FX should be lifted, but stagnant eurozone growth and the risk that the European Central Bank cuts too early suggest that EUR/USD does not lead this rally. Neither does GBP/USD, given our mildly bullish view on EUR/GBP and 100bp of Bank of England easing. Having outperformed this year, we expect the Swiss franc to be flat against the euro in 2024 as the Swiss National Bank seeks more stability than strength in the nominal trade-weighted franc. Better positioned in Europe we think (and conditioned on a lower interest rate environment) are the Scandi currencies. Both the Norwegian krone and the Swedish krona are undervalued – the krone more so. Both central banks would prefer stronger currencies and the krone probably has a better chance of a recovery in 2024 given a stronger economy and its more severe undervaluation after the rally in energy prices.  

GBP: Focus on the autumn statement A year is a long time in politics. Just over a year ago, erstwhile UK Prime Minister Liz Truss blew up the UK gilt market with her plans for unfunded tax cuts. Today, the more fiscally responsible Chancellor, Jeremy Hunt, is also looking to deliver tax cuts – but cuts which do not derail plans to stabilise the UK debt trajectory over a five-year horizon. We think some looser fiscal policy will be welcomed by sterling at this juncture and continue to favour EUR/GBP trading back below 0.8700.

EUR: PMI test for positioning Today’s PMI surveys will be a new opportunity for markets to gauge whether eurozone growth sentiment has indeed bottomed out. Consensus expectations suggest this is the case; while staying in contractionary territory, the general view is that we should see a modest rebound in both the manufacturing and services indices. From an FX perspective, the reaction to the November PMIs will tell us how much position-squaring effects are still playing a role in EUR/USD. Should a surprise in either direction be followed by an exacerbated move in EUR/USD despite thinner trading on Thanksgiving, then we would conclude positioning imbalances persist. We think, however, that some flattening around 1.0900 is more likely. We have seen some recovery in EUR/USD overnight, and it appears that the surprise win of far-right candidate Geert Wilders in the Dutch elections has not had a noticeable market impact so far. EUR/GBP rebounded modestly yesterday after the UK’s Autumn Statement, where Chancellor Jeremy Hunt announced some widely expected cuts to personal and business taxes. The implications for sterling should – in general – be positive as the tax cuts suggest a better growth outlook and potentially stickier inflation. However, it felt like the move in GBP already happened into the announcement, and there was some “buy the rumour, sell the fact” effect causing a softening of the sterling momentum.

FX Daily: Is less growth pessimism enough? PMIs came in stronger than expected in the eurozone and the UK yesterday and will be released in the US today. Despite the notion that eurozone growth pessimism may have peaked, rate differentials still point to a weaker EUR/USD. We see EUR/GBP staying pressured. Riksbank FX sales will be in focus after yesterday's hold, and we don't expect any more hikes.   USD: Half-day trading US markets reopen today after the Thanksgiving holiday, but only for a half-day session. Expect volumes to be very thin again. On the data side, we’ll see the release of US S&P PMIs, a piece of data that has triggered a growing market impact, but may fail to decisively steer the dollar in a low-volume day. As we had expected, the dollar is stabilising amid reduced Thanksgiving flows, and an attempt to rally from the euro and sterling following somewhat encouraging PMIs didn't last much longer.  The quieter US calendar has seen market focus being re-directed, namely on oil market developments, a ceasefire in the Israel-Hamas conflict and Chinese real estate news. On the former, the decision by OPEC+ to delay its meeting scheduled for this weekend due to disagreement on output cuts took a brief hit on crude earlier this week. Our commodities team notes that the ongoing disagreement between members will likely increase volatility within the market over the course of the next week, although it is unclear how this will affect broader policy. In China, we saw an unprecedented policy discussion by the central government to support the real estate sector, as it reportedly planning to allow banks to issue unsecured short-term loans to qualified developers. We would be cautious to think that this will spur a round of optimistic buying on Chinese assets. While it is a positive development on paper, it does signal a very concerned mood in Beijing about the developers' crisis. It should be a relatively quiet day in FX today. We expect the dollar to keep stabilising around current levels. The next two weeks will set the tone for FX markets into Christmas, with key data (like payrolls) published in the US.

GBP: More downside room for EUR/GBP EUR/GBP continues to press the 0.8700 support after what has been a very eventful week in the UK. The tax cuts announced by the Treasury are, on paper, a sterling-positive. They are both pro-growth and pro-inflation and do not seem to have excessively unnerved the bond market – especially when compared to those announced previously under former prime minister Liz Truss. PMIs also came in stronger than expected yesterday, with the services and composite indices moving back above the 50.0 mark. Markets have priced out around 20bp of cuts in the September 2024 contract in the past week. We expect GBP to keep its decent momentum, especially in EUR/GBP, which we expect to make a decisive break below 0.8700 in the coming days. We are still expecting some USD resilience and see a capped upside for Cable.

European stocks on course for their best month since January. By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets look to be on course for their best month since January after the gains of the last few weeks, on the growing anticipation that central banks are not only done on the rate hike front, but that we could start to rate cuts as soon as the early part of 2024.   The shift to bullish from bearish sentiment has also been reflected in the performance of US markets with the S&P500 also on course to post its best monthly performance since July 2022, with US 10-year yields on course for their biggest monthly decline since March.   The Nasdaq 100 has led the way with that index pushing above its July peak and above 16,000, as well as hitting its highest level since January 2022, driven mostly by the so co-called "Magnificent 7" stocks.     While central bankers will do reluctant to countenance the idea of rate cuts in the next 6 to 12 months given it cuts against the "higher for longer" narrative they are so keen to push, the hawkish messaging jars slightly against a backdrop of a deteriorating economic outlook, particularly in Europe.   This messaging is expected to get a further airing this week when we have a host of central bankers set to jawbone the latest narrative about future policy pronouncement. Starting today ECB President Lagarde is due to speak in Brussels, to EU lawmakers as well as tomorrow, although she won't be alone in that with Uber hawk, German Bundesbank President Nagel set to speak in Cyprus earlier in the day.   It is no secret that a number of ECB policymakers continue to push the narrative that rates could go higher, only last week Belgian ECB member Pierre Wunsch argued that rates may have to rise again given that markets were starting to price in cuts next year. His Spanish counterpart Hernandez de Cos was also keen to rule out the likelihood of rate cuts, however the market simply isn't buying into the narrative, given how quickly inflationary pressure is slowing across Europe, alongside the continued deterioration in the latest economic numbers. Tomorrow, we have a host of Fed speakers due to speak on the slate with Fed governors Waller and Bowman, along with the Chicago Fed President Austan Goolsbee, ahead of this week's latest revision to US Q3 GDP, with the resilience of these numbers speaking to the idea that any loosening of monetary policy remaining much further off than for the likes of the ECB and Bank of England.   It's also shaping up to be the worst month for the US dollar since November last year in a sign that more declines could be on the way, as markets bet that the Fed is done on the rate hike front. If this trend continues and there's little reason to suppose it won't we could see a similar trend to last year play out when it comes to the greenback. With US markets finishing higher for the 4th week in a row, in a shortened Thanksgiving session on Friday, markets in Europe look set for a lower open on the back of a softer Asia session, with attention expected to be on the upcoming OPEC+ meeting and the possibility of further output cuts which could be announced at the end of the week with oil prices anchored close to their lows of last week, and on course for their second successive monthly decline.     EUR/USD – currently finding resistance at the 1.0960 area, with the August peaks at 1.1060/70. We need to hold above the 1.0840 area to signal the prospect of further gains. We also have support at the 200-day SMA at 1.0810.   GBP/USD – having broken above the 1.2450 area and 200-day SMA we could well see an extension towards the 1.2720 area, which is 61.8% retracement of the 1.3140/1.2035 down move. Upside momentum remains intact while above 1.2450.   EUR/GBP – appears to be breaking down have slipped below 0.8720 last week we could see further weakness towards the 0.8620 area.   USD/JPY – seen a significant rebound from the lows last week at 147.15, with the current strength capped by the 150.00 area, with a break of 150.20 potentially retargeting the main resistance at the 151.95 area.   FTSE100 is expected to open 19 points lower at 7,469   DAX is expected to open 36 points lower at 15,993   CAC40 is expected to open 20 points lower at 7,272  

GBP: Fiscal divergence Sterling has been performing a little better of late, no doubt buoyed by the better global risk environment. We do also think that the fiscal story has helped, where the UK government plans to put £20bn to work in the economy, while countries like Germany remain hamstrung by its constitutional court. At the same time, the slightly better November PMI readings have supported sterling too.  These developments have left investors looking for just 40-50bp of Bank of England (BoE) easing next year – clearly less than what is expected of the Fed or of the ECB. The UK data calendar is light this week, but we do have several BoE speakers. Governor Andrew Bailey already seems to be playing around with language on forward guidance, where restrictive monetary policy will be retained for an 'extended period'  or, most recently, 'for quite some time'. All in all, we feel that EUR/GBP could correct a little further and a close under 0.8660 could unlock 0.8630 or even 0.8600 this week.

GBP: ECB vs. BoE story dominates Dovish commentary from the ECB has now seen investors pricing ECB rate cuts several months ahead of the Bank of England (BoE) next year and expectations build of a deeper easing cycle in the Eurozone than in the UK. We disagree with that pricing and think the BoE will deliver more hikes than the ECB next year. This probably means that EUR/GBP does not need to spend too much time below 0.8600. Indeed, 0.8500 represents very strong support and we remain happy with our forecasts of EUR/GBP edging up to the 0.88/0.90 area into next year. The UK data calendar is very quiet this week, with just Friday's release on inflation expectations of note. The bigger driver of EUR/GBP this week will be any ECB pushback against dovish pricing of their 2024 policy cycle.

Services PMIs expected to remain soft, as RBA leaves rates unchanged By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets got off to a rather lacklustre start to the week, weighed down by a rebound in the US dollar as well as weakness in basic resources and energy prices, as investors took a pause after the gains of the past couple of weeks.  US markets fared little better, sliding back in the face of a modest rebound in yields as investors hit the pause button ahead of this week's jobs data, which is due at the end of the week, with markets in Europe set to open slightly weaker this morning.   Earlier this morning the RBA left rates on hold at 4.35% after last month's decision to raise rates by another 25bps. Despite last month's surprise decision to raise rates today's decision acknowledged that inflation was now starting to moderate in goods even as concerns remained about services inflation. Nonetheless, despite this acknowledgement that inflation appears to be slowing there was little indication that the central bank was considering another rate move in the near term. Last month's decision to raise rates was driven by concern about domestic price pressures and while today's decision to hold was a relief there was little sign that a policy change in either direction was being considered with Governor Bullock acknowledging significant uncertainties around the outlook.   Nonetheless today's decision to hold came against a backdrop of a month which has seen 2-year yields decline almost 40bps from their 4.52% peaks on the 1st November, as markets surmised the central bank is now done, with the Australian dollar falling sharply.   The recovery in US yields yesterday appeared to be because of the possibility that the declines seen over the past few days may have been a little too much too quickly, given Powell's comments on Friday last week when he pushed back on the idea that rate cuts were on the cards for the first half of 2024.   There is certainly an element of the market getting ahead of itself when you look at a US economy that grew at 5.1% in Q3 and still has an unemployment rate of 3.9%. The same sadly cannot be said for Europe where the French and German economies could well already be in recession.   While recent manufacturing PMI data in Europe suggests that economic activity might be bottoming out, the same can't be said for the services sector which on the basis of recent inflation data is experiencing sticky levels of inflation. This in turn is prompting a continued hawkish narrative from the ECB despite rising evidence that the bloc is already in contraction and possible recession as well. Recent data from the French economy showed economic activity contracted in Q3 and there has been little evidence of an improvement in Q4.   The recent flash PMIs showed that services activity remained stuck in the low 45's, although economic activity does appear to be improving, edging higher to 48.7. The main concern is that the resilience shown by the likes of Spain and Italy as their tourism season winds down appears to have declined after Italy fell sharply in October to 47.7, while Spain was steady at 51.1, although both are expected to show slight improvements in today's November numbers with a rise to 48.3 and 51.6 respectively.   The UK economy also appears to be showing slightly more resilience where there was saw a recovery into expansion territory in the recent flash numbers to 50.5, while earlier this morning the latest British Retail Consortium retail sales numbers for November, which showed that consumers remained cautious despite the increasing number of Black Friday deals ahead of the Christmas period as retailers looked to tempt shoppers into opening their wallets. Like for like sales in November rose 2.6%, the same as the previous month, with sales of high value goods remaining soft, with consumers preferring to go with lower ticket and essential items spend of food and drink, health and personal care.      In the US we also have the latest October JOLTS job opening numbers which are expected to show vacancies slow from 9.5m to 9.3m, while the latest ISM services survey forecast to show a resilient economy.   The headline is expected to show an improvement to 52.3, with prices paid at 58 and employment improving to 51.4 from 50.2 due to additional holiday period hiring. Gold prices are also in focus after yesterday's new record high saw a sharp reversal with prices closing lower in what looks like a bull trap and could see prices pause for a period of time and retest the $2,000 an ounce in the absence of a rebound.     EUR/USD – continues to look soft dropping below the 200-day SMA at 1.0825, with a break of the 1.0800 having the potential to retest the 1.0670 area. Resistance now at the 1.0940 area, and behind that at last week's highs at 1.1015/20.   GBP/USD – the failure to move above the 1.2720/30 area has seen the pound slip back with support at the 1.2590 area currently holding. A break below 1.2570 signals a deeper pullback towards the 1.2460 area and 200-day SMA. A move through the 1.2740 area signals a move towards 1.2820.    EUR/GBP – found support at the 0.8555 area for the moment, but while below the 0.8615/20 area, the risk remains for a move towards the September lows at 0.8520, and potentially further towards the August lows at 0.8490.   USD/JPY – found some support at the 146.20 area in the short term, with resistance now at the 148.10 area. Looks vulnerable to further losses while below this cloud resistance with the next support at the 144.50 area.   FTSE100 is expected to open 15 points lower at 7,498   DAX is expected to open 9 points higher at 16,413   CAC40 is expected to open 3 points lower at 7,329

DAX set to open at a new record high, US ADP report in focus By Michael Hewson (Chief Market Analyst at CMC Markets UK)     European markets saw another positive session yesterday with a new record high for the German DAX, while the FTSE100 fulfilled its role as the perennial party pooper with another disappointing session and closing lower for the second day in succession. This was mainly due to weakness in metals and energy prices with Brent crude prices closing at a 5-month low. US markets also struggled for gains with the Nasdaq 100 closing higher due to a strong performance from the Magnificent 7 led by Apple, and Nvidia, while the Russell 2000 finished the day over 1% lower, with the S&P500 and Dow closing little changed.     The indifferent finish seen in the US has been shrugged off by Asia markets with a strong session there after the Bank of Japan's latest Tankan survey showed a big improvement in manufacturers sentiment with the auto sector with the second successive month of gains as chip shortages eased.   This rebound in Asia markets looks set to filter through into this morning's European open with the DAX set to open at a new record high.   Yesterday's economic data from Europe pointed to a modest improvement in services sector economic activity, while the latest US ISM service sector numbers were a mixed bag, with the headline number coming in ahead of forecasts at 52.7. Prices paid did slow but by less than expected, coming in at 58.3 pointing to stickier than expected inflation, while the employment index edged higher to 50.7.   Today we get a look at the latest ADP payrolls report for November as an appetiser for Friday's non-farm payrolls report. We are starting see increasing evidence that the US jobs market is starting to slow, with vacancies falling to their lowest level since March 2021 and with the last two ADP reports adding a combined 202k new jobs as private sector hiring slows.   October saw 113k jobs added an improvement on September and November is expected to see an improvement on that to 130k, given that a lot of additional hiring takes place in the weeks leading up to Thanksgiving and the Christmas period so we're unlikely to see any evidence of cracking in the US labour market this side of 2024.   We also have the latest rate decision from the Bank of Canada where we aren't expecting any changes to monetary policy here with the central bank forecast to keep rates unchanged at 5%.   The last 3-months have seen no growth in the economy at all while the October jobs report saw a rise of 17.5k jobs, all of these were part time positions. On full time employment we saw the first decline in jobs growth since May with a decline of -3.3k, while unemployment rose from 5.5% to 5.7% and the highest level since January 2021. We're also starting to see inflationary pressure continue to subside with core CPI on the median slipping from 3.9% to 3.6% in October.    EUR/USD – has fallen below the 200-day SMA at 1.0825, with a fall below the 1.0800 level raising the prospect of a move towards the 50-day SMA just below the 1.0700 area. Resistance now at the 1.0940 area, and behind that at last week's highs at 1.1015/20.   GBP/USD – the failure to move above the 1.2720/30 has seen the pound slip back towards support at 1.2580/90 area. A break below 1.2570 signals a deeper pullback towards the 1.2460 area and 200-day SMA. A move through the 1.2740 area signals a move towards 1.2820.    EUR/GBP – has found support at the 0.8555 area and is currently looking to recover through the 0.8600 area. While below the 0.8615/20 area, the risk remains for a move towards the September lows at 0.8520, and potentially further towards the August lows at 0.8490.   USD/JPY – currently trying to rally off the recent lows at the 146.20 area, with resistance now at the 148.10 area. Looks vulnerable to further losses while below this cloud resistance with the next support at the 144.50 area.   FTSE100 is expected to open 25 points higher at 7,514   DAX is expected to open 56 points higher at 16,589   CAC40 is expected to open 20 points higher at 7,407

China trade disappoints, as Moody's downgrade weighs on Asia markets By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets saw another positive day yesterday, with the DAX posting another record high, while the FTSE100 broke 2 days of declines to close higher as well.   The outperformance on European markets appears to be being driven by the increasing belief that the European Central Bank may well be forced into cutting rates sharply in the early part of 2024 in response to sharply slowing inflation and a sclerotic economy.   The last few days has seen a sharp decline in bond yields reflecting an increasing belief on the part of investors that rather than higher for longer, central banks will start cutting rates as soon as Q2 next year. The shift in tone has been most notable from several ECB policymakers who have indicated that rate hikes are done.   US markets also appear to have started to run out of steam after their big November rally, as traders take stock of how resilient the US economy is.   Asia markets on the other hand have struggled with the latest set of Chinese trade numbers pointing to an economy that is still struggling, and a downgrade by Moody's on China's credit outlook, along with downgrades to banks, and other small companies which looks set to weigh in the European open this morning, in the wake of weakness in Asia markets.   In October Chinese import data broke a run of 10 consecutive negative months by rising 3% in a sign that perhaps domestic demand is returning, beating forecasts of a 5% decline.   Slightly more worrying was a bigger than expected decline in exports which fell -6.4%, the 6th month in a row they've been lower, and a worrying portend that global demand remains weak, and unlikely to pick up soon. Today's November numbers have seen imports decline by -0.6%, against an expectation of a rise to 3.9% in a sign that domestic demand is still very weak, while exports improved, rising by 0.5% a solid pick up from the -6.4% decline in October.   Yesterday's US ADP payrolls report saw jobs growth in November slow to 103k, in a further sign that the labour market is slowing, with the last 3 months showing significant evidence that hiring is slowing. This trend was also reflected in this week's fall in October job openings to 8.7m the lowest level since March 2021.   For the time being weekly jobless claims have shown little signs of increasing, trending in the low 210k for the last couple of months.   Continuing claims on the other hand have been edging higher rising to a 2-year high last week 1.93m. Today's claims numbers are expected to come in at 220k, with continuing claims set to also remain steady, ahead of tomorrow's eagerly anticipated non-farm payrolls report.   EUR/USD – continues to slip lower raising the prospect of a move towards the 50-day SMA just below the 1.0700 area. Resistance now at the 1.0825 and 200-day SMA, while above that at the 1.0940 area.   GBP/USD – remains under pressure as it continues to slip away from the 1.2720/30 area. A break below 1.2570 signals a deeper pullback towards the 1.2460 area and 200-day SMA. A move through the 1.2740 area signals a move towards 1.2820.    EUR/GBP – while below the 0.8615/20 area, the risk remains for a move towards the September lows at 0.8520, and potentially further towards the August lows at 0.8490.   USD/JPY – currently trying to rally off the recent lows at the 146.20 area, with resistance now at the 148.10 area. Looks vulnerable to further losses while below this cloud resistance with the next support at the 144.50 area.   FTSE100 is expected to open 29 points lower at 7,486   DAX is expected to open 52 points lower at 16,604   CAC40 is expected to open 24 points lower at 7,412

Bank of England to push back against rising tide of rate cut expectations Markets are pricing three rate cuts in 2024 and we doubt the Bank will be too happy about that. Expect policymakers to reiterate that rates need to stay restrictive for some time. But with services inflation coming down and wage growth set to follow suit, we think investors are right to be thinking about a summer rate cut. We expect 100bp of cuts next year.   Markets are ramping up rate cut bets, and Governor Bailey isn't happy about it Financial markets are rapidly throwing in the towel on the “higher for longer” narrative that central banks have been pushing hard upon for months. Even more remarkably, a small but growing number of policymakers from the Federal Reserve to the European Central Bank seem to be getting second thoughts too. So far, that market repricing has been less aggressive for the Bank of England. Investors are expecting three rate cuts next year compared to more than five over at the ECB. The first move is seen in June, as opposed to March over in Frankfurt. Despite that more modest adjustment, the Bank of England is starting to sound the alarm. Governor Andrew Bailey said in recent days that he is pushing back “against assumptions that we're talking about cutting interest rates". Those comments followed a firming up of the Bank’s forward guidance back in early November, where it said it expected rates to stay restrictive for “an extended period”. Its November forecasts, premised on rate cut expectations at the time, indicated that inflation may still be a touch above 2% in two years’ time. That was a hint, if only a mild one, that markets were prematurely pricing easing - and rate cut bets have only been ramped up since.   Rate cut expectations are building, though less rapidly than in the US/eurozone   Expect rate cut pushback on Thursday, but investors are right to be thinking about easing That gives us a flavour of what we should expect next week. While the chances of a surprise rate hike have long since faded away, there’s a good chance that the three hawks on the committee once again vote for another 25bp rate increase, leaving us with a repeat 6-3 vote in favour of no change. We only get a statement and minutes on Thursday, and no press conference or forecasts, so the opportunity to shift the messaging is fairly limited. But we expect the same hawkish forward guidance as last time, including the line on keeping rates restrictive for a prolonged period of time. Could the Bank be tempted to go further still and formally say that markets have got it wrong? The BoE has shown itself less willing than some other central banks to either comment directly on market pricing in its post-meeting statements, or make predictions about how it'll vote at future meetings. The last time it did this was in November 2022, where disfunction in UK markets meant rate hike pricing had reached an extreme level. We doubt they’ll do something similar this month. Policymakers may be uneasy about the recent repricing of UK rate expectations, but central banks globally have learned the hard way over the last couple of years that trying to predict and commit to future policy, with relative certainty, is a fool's game. The Bank will also be gratified that the data is at least starting to go in the right direction. Services inflation came in below the Bank’s most recent forecast, and while one month doesn’t make a trend, we think there are good reasons to expect further declines over 2024. Admittedly, we think services CPI will stay sticky in the 6% area through the early stages of next year, but by the summer, we expect to have slipped to 4% or below. Likewise, the jobs market is clearly cooling and that suggests the days of private-sector wage growth at 8% are behind us. We expect this to get back to the 4-4.5% area by next summer too. Markets may be right to assume that the BoE will be a little later to fire the starting gun on rate cuts than its European neighbours. But when the rate cuts start, we think the BoE’s easing cycle will ultimately prove more aggressive. We expect 100bp of rate cuts from August next year, and another 100bp in 2025.   Sterling benefits from the BoE position Sterling has enjoyed November. The Bank of England's trade-weighted exchange rate is about 2% higher. The rally probably has less to do with the UK government's stimulus and more to do with the fact that investors have been falling over themselves to price lower interest both in the US and particularly in the eurozone.  In terms of the risk to sterling market interest rates and the currency from the December BoE meeting, we tend to think it is too early for the Bank of England to condone easing expectations - even though those expectations are substantially more modest than those on the eurozone. This could mean that EUR/GBP continues to trade on the weak side into year-end - probably in the 0.8500-0.8600 range. Into 2024, however, we expect market pricing to correct - less to be priced for the ECB, more for the UK and EUR/GBP should head back up to the 0.88 area. But that's a story for next year.    Sterling trade-weighted index edges higher

Big week for central banks as China falls into deflation By Michael Hewson (Chief Market Analyst at CMC Markets UK)   Markets in Europe finished higher again last week with the DAX up for the 6th week in a row, while the FTSE100 returned to levels last seen on the 19th October, after the latest US jobs report came in better than expected, and unemployment unexpectedly fell to 3.7%.   US markets also finished the week strongly with the S&P500 pushing above its summer highs to close at its highest level this year, with the Nasdaq 100 not too far behind, with the tech sector, once again instrumental in achieving the bulk of this year's outperformance.   The catalyst for the strong finish was a solid US jobs report which showed 199k jobs were added in November, while the unemployment rate slipped to 3.7%. With the participation rate returning to 62.8% and wages remaining at 4%, the idea that the Federal Reserve will be compelled to cut rates aggressively underwent a bit of a setback with yields moving sharply higher, as 2024 rate cut expectations got pared back.   The apparent resilience of the US economy against a backdrop of a sharp fall in inflation expectations from the latest University of Michigan confidence survey has helped craft a narrative that despite the sharp rise in interest rates delivered over the past 18 months, the US economy will be able to avoid a severe recession.   This scenario does present some problems for the Federal Reserve when it comes to managing market expectations of when rate cuts are likely to come, with the recent sharp fall in yields globally speaking to a widespread expectation that rates may well be cut sharply as we head into 2024.   As far as the US economy is concerned aggressive rate cuts at this stage look a little less likely than they do elsewhere where we've seen sharp CPI slowdowns in the pace of inflationary pressure. Earlier this month the latest EU inflation numbers showed headline CPI slow to 2.4% in November, while German CPI was confirmed at 2.3% as month-on-month prices declined by 0.7%, the second month in a row, CPI went negative.   Germany isn't unique in this either given that PPI inflation had already given plenty of indication of the direction of travel when it came to price deflation.   In China over the weekend headline CPI also went negative in November, only in this case it was on the annualised number to the tune of -0.5%, for the second month in a row and for the 3rd month in the last 5. PPI inflation also remained in negative territory to the tune of -3%, the 14th month in succession as the world's 2nd biggest economy grapples with deflation, and slowing domestic demand.   This deflationary impulse appears to be already making itself felt in Europe, and truth be told has been doing so for some time, the only surprise being how blind to it certain parts of the European Central Bank have been to it.   These concerns over deflation while slowly starting to be acknowledged don't appear to be being taken seriously at the moment, although in a welcome shift we did hear Germany ECB governing council member Isabel Schabel admit that they had been surprised at how quickly prices had slowed over the past few months, even as economic activity stumbled sharply.     Consequently, this week's central bank meetings of the Federal Reserve, European Central Bank and the Bank of England are likely to be crucial in managing expectations when it comes to the timing and pace of when markets can expect to see rate cuts begin now, we know the peak is in.   Of all the central banks the Fed probably has the easiest job in that they have more time to assess how the US economy is reacting to the tightening seen over the past few months.   The ECB has no such luxury given that the two biggest economies of Germany and France could well be in recession already, and where prices could slide further as we head into 2024.   The fear for central banks is that a lot of the slowdown in inflation has been driven by the recent slumps in crude oil and natural gas prices and could well be transitory in nature, and with wage inflation still elevated will be reluctant to signal the "all clear" too soon.   The Bank of England has a similar problem although the UK economy isn't showing the same levels of weakness as those of France and Germany, and furthermore inflation in the UK is almost double that of Europe, with wage costs and services inflation even higher.   As we look towards a new trading week, and probably the most consequential one this month, European markets look set to open slightly higher as investors look back at the inflation numbers from the weekend and extrapolate that 2024 may well be the year that rates start to come down, with the main risk being in overestimating by how far they fall.      EUR/USD – slid down towards the 200-day SMA on Friday, stopping just short at 1.0724, with a break below 1.0700 targeting the prospect of further losses toward the November lows at 1.0520. We need to see a move back through 1.0830 to stabilise.   GBP/USD – slid to the 1.2500 area but remains above the 200-day SMA for now, with only a break below 1.2460 signalling a broader test of the 1.2350 area. Resistance currently at 1.2620 area.    EUR/GBP – still range trading between the 0.8590 area and the lows last week at 0.8550. While below the 0.8615/20 area the risk remains for a move towards the September lows at 0.8520, and potentially further towards the August lows at 0.8490. USD/JPY – finding a level of support at the 200-day SMA at 142.50 after last week's steep fall. We need to see a daily close below the 200-day SMA to open a test of 140.00 and then on towards 135.00. Resistance back at 146.20.   FTSE100 is expected to open 7 points higher at 7,561   DAX is expected to open 25 points higher at 16,784   CAC40 is expected to open 11 points higher at 7,537

UK wage growth and US CPI set to slow   By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European equity markets got off to a slow start to the week yesterday, closing modestly higher with the FTSE100 underperforming due to concerns over weak demand out of China.   US markets were also resilient with the S&P500 and Dow both eking out new highs for 2023, as investors looked cautiously towards this week's central bank meetings of the Federal Reserve, European Central Bank, and the Bank of England, and their respective outlooks for rate policy heading into 2024.     Asia markets have continued in the positive vein of yesterday with that momentum set to continue into today's European open.   With the Federal Reserve due to start its 2-day meeting later today, and the Bank of England set to decide on rates on Thursday, today's UK wages data and US CPI numbers could go some way to shaping how policymakers react when they deliver their guidance on monetary policy later this week.     We start with the latest UK wages numbers for the 3-months to October and where wages have been trending higher by more than 8% for the last 3-months if bonuses are included.   Some at the Bank of England have been fretting about this high level of wages growth but they really shouldn't be given how badly inflation has impacted the pay packets of consumers these past 2 hours.   All that is happening now is that some of the purchasing power that has been lost over the last few months is slowly being clawed back and for the most part will take years to recover back to pre-pandemic levels. The central bank needs to be careful about overreacting to a phenomenon that they were too slow in reacting to on the way in.     With food prices only just recently dropping below 10% for the first time in over a year it can hardly be a wage price spiral if consumers are finally seeing the price/wage ratio finally starting to turn positive in their favour. Expectations are for wages ex-bonuses to slow from 7.7% to 7.4%, which might not be enough to reverse the calls for further rate hikes from the 3 hawks on the MPC, of Mann, Haskel and Greene. Later this afternoon we'll get to see whether the slowdown we saw in US CPI during October has continued into November.   US inflation fell to 3.2% in October, down from 3.7% reversing a trend that had seen inflation fall to 3% in June, before gaining ground in subsequent months.   Core CPI on the other hand has been steadier, slowing at a more modest pace and coming in at 4%. More importantly, super core inflation which the Fed monitors closely also slowed, and with the risk of a US government shutdown postponed until January next year, the economic risks to the US economy appear to have diminished further.   There has been some concern that the resilience of the US economy may delay the return to the 2% target, however judging by the latest PPI data there is little sign of inflationary pressure in respect of company's costs. These also slowed sharply in October declining -0.5%, dragging final demand down from 2.2% to 1.3%, in a sign that we could see further downside in US CPI, with the potential to slip below 3% before the end of the year.     Headline CPI for November is forecast to slow to 3.1%, with core prices remaining steady at 4%.       EUR/USD – holding above the 200-day SMA for now, stopping short last week at 1.0724, with a break below 1.0700 targeting the prospect of further losses toward the November lows at 1.0520. We need to see a move back through 1.0830 to stabilise. GBP/USD – tight range but holding above the 200-day SMA for now, with only a break below 1.2460 signalling a broader test of the 1.2350 area. Resistance currently at 1.2620 area.  EUR/GBP – still range trading between the 0.8590 area and the lows at 0.8545/50. While below the 0.8615/20 area the risk remains for a move towards the September lows at 0.8520, and potentially further towards the August lows at 0.8490. USD/JPY – after last week's test of the 200-day SMA at 142.50 we've seen a solid rebound with the move above 146.20 arguing for a move back towards 148.20. FTSE100 is expected to open 13 points higher at 7,558 DAX is expected to open 51 points higher at 16,845 CAC40 is expected to open 18 points higher at 7,569

Santa comes early as Fed pivots, Bank of England and ECB up next By Michael Hewson (Chief Market Analyst at CMC Markets UK)     It had been widely anticipated that Fed chairman Jay Powell's main challenge yesterday would be in trying to push back on the idea that the US central bank was ready to cut rates sharply over the next 12 months. With the sharp fall in yields since November there was an expectation that the loosening in financial conditions might put the central banks fight against inflation at risk.   It was therefore quite surprising that yesterday's statement and dot plots embraced that narrative, delivering an early Christmas present to the markets, returning the 2024 median for dot plots to 4.6%, back to where it had been in September, while forecasting core PCE to decline to 2.4%.     The US dollar sank, along with 2-year yields which fell 30bps to a 6-month low, gold surged back above $2,000 an ounce, and US markets pushed up to their highest levels this year, with the Dow posting a new record high, confounding market expectations of a hawkish pushback.      At the press conference Powell tried to give the impression that the Fed retained the option to hike rates again, however this message is rather undermined by the fact that the FOMC cut their dot forecasts as much as they did. The admission that the FOMC discussed rate cuts was also noteworthy.     If "higher for longer" wasn't dead before last night, it certainly is now, and certainly makes the job of both the Bank of England, as well as the ECB later today that much harder in maintaining a hawkish bias, with European markets set to open sharply higher, with new record highs expected for the DAX and CAC 40.       Having seen the Federal Reserve leave rates unchanged yesterday its now the turn of the Bank of England and ECB to follow suit, as well as try to navigate the messaging of when they expect to start cutting them. When the Bank of England took the decision to hold rates steady in September it was a close-run thing, but on the balance of risks it was also probably the right one given the challenges facing the economy as we head into year end.     These challenges have been thrown into sharper focus this week with wage growth slowing to 7.3%, and an economy that contracted by -0.3% in October. This week's data has prompted markets to price in the prospect that the BOE will prioritise the UK economy over its battle against inflation, with yields dropping sharply to their lowest levels since June.   The emphasis in recent meetings to what has become a "Table Mountain" approach to rate policy, and a higher for longer approach does present some problems in terms of messaging especially when growth is slowing sharply however when looking at high levels of services and wage inflation it's hard to see how the Bank of England can overlook that even against the currently challenging growth outlook.   Now that the energy price cap inflation is out of the headline numbers, CPI is now back at a more manageable level of 4.6%, well below last year's peak of 11.1%, although core prices are still at a lofty 5.7%. The Bank of England's biggest concern however is wage growth which is currently at 7.3%, while services inflation is at 6.6%, and appears to be behind some of the dissent on the MPC amongst those who still want higher rates, although this number has shifted to 3 external members of Catherine Mann, Megan Greene, and Jonathan Haskel.   It will be interesting to see if they drop their dissent given this week's economic data, and opt for the status quo today, with the markets also already pricing in some rate cuts for next year. These will still probably happen; however, they may not come as early as markets are currently pricing given current inflation levels. When they do happen, they are likely to come well after the ECB starts cutting given inflation here in the UK is still over 2% higher than it is in the EU on an annualised basis.   This is the challenge facing the ECB today given that they were the central bank which raised rates as recently as September, and a dovish pivot today would surely be an admission that the ECB erred 3-months ago.  When the ECB met in October President Christine Lagarde said that risks to growth were tilted to the downside, but also that inflation was still too high, although it isn't now given headline CPI for November is now at 2.4%.   At the time there was no commitment as to whether the ECB was done on the rate hike front, however that has now changed given recent comments from Germany's Schnabel and France's Villeroy. Recent economic data coming out of Europe since June has been dire and we now know that the ECB governing council has been surprised at how quickly inflation has slowed.   Putting to one side that it shouldn't be a surprise given the trend in PPI over the past 12 months a few other members of the Governing council, have also admitted that the next move in rates is likely to be lower in 2024.   That's not surprising given that in Q3 the French economy slipped into contraction, and with Germany not having seen much in the way of growth this year markets are now pricing in rate cuts for as soon as April 2024. It was also noteworthy that at the start of this month Villeroy said that rate hikes were over based on the current data, thus supporting the view that inflation was returning to target. That is already quite apparent with November CPI falling to 2.4%, having been at 5.3% only 3 months before.     No changes in policy are expected with the biggest challenge facing Christine Lagarde today being in convincing the market that rate cuts won't begin much before the summer of next year, given how bad the economy in Europe already is.      EUR/USD – yesterday's rebound pushed above the 200-day SMA this time opening the prospect of a move towards 1.0940. Support still above the 50-day SMA at 1.0720.   GBP/USD – held above the 200-day SMA at 1.2500 yesterday rallying strongly. A break below the 200-day SMA and 1.2460 signals a broader test of the 1.2350 area. Having broken resistan ce at the 1.2620 area could extend towards 1.2720.   EUR/GBP – breaking higher and heading towards the 100-day SMA at 0.8640. Support now at 0.8580.   USD/JPY – the US dollar slid sharply yesterday having run into resistance at 146.60, falling below 144.70, dropping below the 200-day SMA at 142.50, and could see a retest of the 140.00 area.     FTSE100 is expected to open 72 points higher at 7,620   DAX is expected to open 177 points higher at 16,943   CAC40 is expected to open 84 points higher at 7,615  

Weak start for Europe ahead of German IFO - By Michael Hewson (Chief Market Analyst at CMC Markets UK)  After an unexpectedly dovish pivot from Fed chairman Jay Powell on Wednesday, European and US markets ended another positive week very much on a mixed note after New York Fed President John Williams pushed back on market expectations of a rate cut as early as March, saying it was premature to be even considering anything of that sort.   Williams was followed in his comments by Atlanta Fed President Raphael Bostic who delivered a similar line of thought, saying he expected rate cuts to begin in Q3 of 2024 if inflation falls as expected. With the Fed dots indicating that US policymakers saw rates back at 4.6% this appears to be more in line with the message the Fed had hoped to deliver on Wednesday, however markets decided to take Powell's press conference comments and run with them, getting out in front of their skis in doing so.   Given where the US economy is now it's surprising that the Fed are said to be to start to be thinking in terms of cutting rates simply because with the economy currently where it is, there is currently no need. With GDP at 5.2% in Q3, unemployment at 3.9%, and weekly jobless claims at just over 200k the risk of inflation reigniting is clearly still a concern for some policymakers.   That certainly doesn't appear to be the case in Europe where economic activity is stagnating at best and even now the ECB comes across as being reluctant to counter a rate cut, even though a reduction in borrowing costs is clearly needed, given that headline inflation is back within touching distance of its 2% target.   The same could be argued for the UK except wage growth is still trending well above 7%, while headline CPI is at 4.6%, though this could come down further in numbers due to be released on Wednesday.   As we look towards the final week before the Christmas break, trading activity is likely to be somewhat thin and choppy, and while we have seen record highs for the Dow, DAX and CAC 40 in the last week or so, we still remain some distance away from the 2021 record peaks of the Nasdaq 100 and S&P500.   As for the FTSE100 we're looking at yet another year of underperformance, after the record highs of mid-February, with the UK benchmark up by just over 1% year to date, with the FTSE250 not faring that much better.   Due to the relatively subdued nature of Friday's US finish, today's European market open looks set to be a slightly weaker one with the only data of note the latest German IFO Business survey for December. Given the weak nature of last week's PMI numbers it would be surprising to see a significant improvement on the November numbers when the current assessment improved slightly to 89.4.   The US dollar was one of the big losers last week driven lower by expectations that US rates have peaked and are on their way back down, with the Japanese yen one of the biggest gainers.   This shift in sentiment will no doubt be welcomed by the Bank of Japan and to some extent helps them out with respect to the weakness of the yen ahead of tomorrow's rate decision. There is now less incentive for them to think about altering their current policy settings, although they might hint at starting to execute some form of shift early next year.      EUR/USD – the rebound to 1.1010 last week didn't last long, unable to push through the November peaks at 1.1015/20. We still have support now back at the 200-day SMA at 1.0830. A break above 1.1030 has the potential to target the July peaks at 1.1275.   GBP/USD – broke briefly above the 1.2730 area, and the 61.8% retracement of the 1.3140/1.2035 down move, pushing up to 1.2795 before reversing. The bias remains for further gains while above the 200-day SMA at 1.2520. We also have support at the 1.2590 area.   EUR/GBP – slipped back from the 100-day SMA at 0.8640 last week, with support at the 0.8570/80 area. A move below 0.8580 targets 0.8520.   USD/JPY – slipped below the 200-day SMA at 142.50 last week, opening the prospect of a move towards 140.00. We now have resistance at 146.00 and while below that we could push towards 139.20.     FTSE100 is expected to open 7 points lower at 7,569   DAX is expected to open 15 points lower at 16,736   CAC40 is expected to open 3 points lower at 7,594

GBP: Eyes on inflation this week This week, the focus in the UK will be on CPI data for November out on Wednesday. As usual, we'll be paying attention to services inflation, which we estimate to come in at 6.6%, showing little near-term progress. That may help markets ease some of the rate cut bets in the UK and help the pound. Markets are still pricing in four rate cuts by the Bank of England this week despite the Bank’s attempt to discourage dovish bets via in-meeting communication. We still think services inflation in the UK will ease to around 4% by next summer, allowing the BoE to start cutting, but the pound has decent room to benefit from some hawkish repricing in the short run. Last week’s 0.8550 lows in EUR/GBP may well be retested by the end of December.

European markets finished a choppy week with a modest rebound, with the FTSE100 breaking a 3-day losing streak, although it still fell for the second week in succession having sunk to a 3-week low midweek. US markets also had a more positive week with the S&P500 briefly pushing above the 4,800 level for the first time in 2 years.    The catalyst for Friday's push higher was a downside miss in US PPI for December which pulled forward speculation yet again about central bank rate cuts, which helped pull the US 2-year yield to its lowest level since May last year.   We also saw similar sharp declines in UK and German 2-year yields as well, although the market enthusiasm and pricing for rate cuts isn't anywhere near as aggressive as it is for the prospect of a cut in US rates. This comes across as a little bizarre given that of all the major economies now the US appears to be in much better shape, and therefore in less need of the stimulus of a rate cut. Last week's PPI numbers served to overshadow a hotter than expected CPI figure which saw headline inflation in the US push up from 3.1% to 3.4%, the second time we've seen US inflation rebound from the 3% level since June last year.     This uncertainty suggests that markets could be jumping the gun when it comes to the likelihood of March rate cuts, and it is the 2-year yield where this is being priced most aggressively. With earnings season now under way in the US with the first set of Q4 bank results garnering a rather mixed market reaction, although there was nothing significant in the numbers to suggest that the US consumer was feeling the pressure from current interest rate levels. Today the US is off for Martin Luther King Day which means markets in Europe could well be more subdued than normal, and so far this year there hasn't been that much to get particularly excited about anyway. The markets already know that the Federal Reserve is done when it comes to further rate increases, and currently have six 25bps rate cuts priced in for this year. That seems rather a lot and is more than the three the Fed have in their dot plot projections.     Nonetheless while markets in Europe and the US have got off to an uncertain start, one index that hasn't is the Nikkei 225 which has raced out of the blocks, pushing up to its highest levels in 34 years and up over 5% year to date already, and in so doing has got people speculating whether we can see a return to those 1989 peaks of 38,957. This week the focus is set to be very much on the UK economy in the wake of Friday's better than expected November GDP numbers, which raised the prospect that the economy may have avoided a technical recession at the end of last year, as a rebound in services activity saw the economy expand by 0.3%. This week we get data for wages and unemployment for November, as well as December CPI and retail sales, all of which have the potential to shift the dial on the timing of a first rate cut from the Bank of England. With inflation still almost double the Bank of England's 2% target and wage growth still upwards of 7% the idea that the central bank would look at cutting rates much before the summer seems unlikely. That said many are suggesting that inflation could be back at 2% by April, however even if that were the case we won't find out until the middle of May when the numbers are released. Against this sort of backdrop, it would be unlikely if he Bank of England were to act on rates until it sees the whites of the eyes of a lower inflation rate, especially since at the last meeting we still had 3 members of the MPC voting for a hike. It's unlikely they will vote the same way in February but nonetheless they are unlikely to go from hiking to cutting with only one meeting in between unless the wheels come off in spectacular fashion.     EUR/USD – currently looking to move higher but needs to move above the 1.1000 area to signal further gains. Short term support still at 1.0875 and the 200-day SMA at 1.0830. A break above 1.1030 has the potential to target the December peaks at 1.1140. GBP/USD – currently finding resistance at the 1.2800 area last week, slipping back to 1.2690 but remains in the wider uptrend with support just above the 1.2600 area. We need to get above 1.2800 to target the 1.3000 area. EUR/GBP – ran out of steam at the 0.8620 area last week, although we also have resistance at the 0.8670 area. Still have support just above the 0.8570/80 area, with the main support at the December lows at 0.8545. USD/JPY – ran into resistance at the 50-day SMA at 146.40 last week. Support currently at the 200-day SMA now at 143.80. We need to push above last week's high above 146.40 to keep 148.00 in sight or risk a return to 140.00. FTSE100 is expected to open 11 points higher at 7,636 DAX is expected to open 65 points higher at 16,769 CAC40 is expected to open 19 points higher at 7,484

GBP: Services inflation to stay above 6% The data flow picks up this week in the UK, with labour (Tuesday), CPI (Wednesday) and retail sales (Friday) statistics for the month of December being released. Services inflation is what matters the most for the Bank of England at the current stage and we expect to see it at 6.1% this week, considerably below the Bank of England's estimates. Despite the improvement in services disinflation, 6%+ remains too high and is unlikely to make the BoE endorse dovish rate expectations just yet. EUR/GBP can retest the 0.8573 lows, but we expect it to find a bit more support this week as the euro may benefit from some hawkish comments by Lagarde in Davos. Our medium-term view on the pair remains bullish.

Bank of Japan stays on hold, UK public finances in focus By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets saw a cautious but broadly positive start to the week, despite weakness in basic resources which served to weigh on the FTSE100. US markets picked up where they left off on Friday with new record highs for the Dow, S&P500 and Nasdaq 100 although we did see a loss of momentum heading into the close, as US yields rebounded off their lows of the day.   The tentative nature of yesterday's gains appears to be being driven by a degree of caution ahead of some key risk events over the next couple of weeks, starting today with the latest Bank of Japan policy decision. This is set to be followed by the European Central Bank on Thursday, and then the Fed and Bank of England next week.   For most of this month central banks have been keen to reset the policy narrative when it comes to the timing of rate cuts which had markets pricing in the prospect of an early move. While US markets have managed to shrug off the prospect of a delay to possible rate cuts, markets in Europe have struggled with the concept probably due to the weakness of the underlying economy relative to how the US economy has been performing. There is a sense that the ECB is over prioritising the battle against inflation which is coming down rapidly and not seeing the damage that is being done to the wider economy by keeping rates higher than they need to be.   Today's Bank of Japan decision didn't offer up any surprises with the central bank keeping monetary policy unchanged against a backdrop that has seen market expectations of rate cuts from other central banks increase markedly since the last Fed meeting. This shift in expectations has helped to ease some of the pressure on the BoJ to look at tightening policy itself to slow the decline of its own currency. The bank also cut its inflation forecast for this year from 2.8% to 2.4%, while nudging its 2025 forecast slightly higher to 1.8%.   Asia markets have seen a more upbeat session on reports that Chinese authorities are looking at a package of stimulus measures to help stabilise the stock market, which could come as soon as next week. Despite this more positive tone European markets look set to open only modestly firmer, with the only economic data of note due today being the latest public finance data from the UK for December.  As far as UK government borrowing is concerned rising interest costs at the beginning of Q4 served to exert upward pressure on the headline numbers, pushing borrowing up to £16bn in October, the second highest October number since 1993. Since those October peaks, gilt yields have declined sharply, along with headline inflation, helping to ease borrowing costs in the mortgage market. This weakness has also come as a welcome relief to the Chancellor of the Exchequer, after UK 10-year yields fell to a low of 3.44%, down from a peak of 4.73% in October. These lower interest costs are likely to see December borrowing slow to £14.1bn, while January could see a surplus as end of year tax payments boost the numbers.     EUR/USD – currently has support at the 200-day SMA at 1.0840. A break below here and the 1.0800 level targets the 1.0720 area. Currently capped at the 50-day SMA with main resistance up at 1.1000.  GBP/USD – remains resilient with support just above the 50-day SMA and 1.2590 area. We need to get above 1.2800 to maintain upside momentum. Also have support at the 200-day SMA at 1.2550. EUR/GBP – continues to find support at the 0.8540/50 level which has held over the last 2-months. A fall through here could see further falls towards the 0.8520 area. We still have resistance at the 0.8620/25 area and the highs last week. USD/JPY – has retreated modestly from the 148.50 area but remains on course for the 150.00 level. Pullbacks likely to find support at the 146.25 level cloud support as well as the 50-day SMA. FTSE100 is expected to open 15 points higher at 7,502 DAX is expected to open unchanged at 16,683 CAC40 is expected to open 7 points higher at 7,420

EUR: A new PMI test EUR/USD is around 1.0% cheaper compared to its short-term financial fair value at current levels. Normally, only deviations beyond the 1.5 standard deviation band (+/- 1.5% for EUR/USD) are followed by rapid convergences to the fair value. However, we believe the dollar rallied a bit too far yesterday, and there is some room for EUR/USD to tick back above 1.0900 into tomorrow’s European Central Bank announcement (here is our preview). At the same time, much of today’s price action in the pair will depend on PMIs. French and German figures are published ahead of the eurozone-wide numbers this morning. Expectations are modestly optimistic, with the eurozone composite PMIs seen rising from 47.6 to 48.0, led by marginal gains in both services and manufacturing. PMIs are often assessed in comparison with other countries. In the case of the eurozone, against the US and the UK. The consensus for UK PMIs is for a flat 52.1 (composite) reading. Barring a material surprise in the eurozone print, the lingering divergence between contractionary (EZ) and expansionary (UK) PMIs will keep EUR/GBP pressured today.

05:40GMT Thursday 25th January 2024 ECB and US Q4 GDP in focus By Michael Hewson (Chief Market Analyst at CMC Markets UK) European markets saw a much more positive session yesterday, carrying over the momentum from a buoyant US market, but also getting a lift after China announced a 0.5% cut in the bank reserve requirement rate from 5th February. US markets finished the day mixed with the Dow finishing lower for the 2nd day in succession, while the S&P500 and Nasdaq 100 once again set new record highs, as well as record closes, although closing off the highs of the day as yields edged into positive territory. This divergence between the Dow and Russell 2000, both of which closed lower for the second day in succession, and the Nasdaq 100 and S&P500 might be a cause for concern, given how US market gains appear to be being driven by a small cohort of companies share prices. Today's focus for European markets which are set to open slightly lower, is on the ECB and the press conference soon after with Christine Lagarde, where apart from questions on timelines about possible rate policy, Lagarde could face some questions a little closer to home amidst dissatisfaction over her leadership style from ECB staffers. When looking at the economic performance of the euro area, we've seen little in the way of growth since Q3 of 2022, while inflation has also been slowing sharply. Yet for all this economic weakness, a fact which was borne out by yesterday's flash PMI numbers, especially in the services sector, the ECB has been insistent it is not close to considering a cut in rates, having hiked as recently as last September. Only as recently as last week we heard from a few governing council members of their concerns about cutting too early, yet when looking at the data, and the fact that the German economy is on its knees, the ECB almost comes across as masochistic in its desire to combat the risks of a return of inflation. In a way it's not hard to understand given that after November headline inflation slowed to 2.4%, it picked up again in December to 2.9%, while core prices slowed to 3.4%. This rebound in headline inflation while no doubt driven by base effects will be used as evidence from the hawks on the governing council that rates need to stay high, however there is already evidence that the consensus on rates is splintering, and while no more rate hikes are expected the economic data increasingly supports the idea of a cut sooner rather than later. Markets currently have the ECB cutting rates 4 times this year in increments of 25bps, starting in June, although given the data we could get one in April. This contrasts with the market pricing up to 6 rate cuts from the Federal Reserve despite the US economy being magnitudes stronger than in Europe. No changes are expected today with the main ECB refinancing rate currently at 4.5%, however Q4 GDP due next week, and January CPI due on 1st February calls for a March/April rate cut could start to get louder in the weeks ahead, especially since PPI has been in deflation for the last 6 months. US bond markets appear to be starting to have second thoughts about the prospect of 6 rate cuts from the Federal Reserve this year, although there is still some insistence that a March cut remains a realistic possibility. Today's US Q4 GDP numbers might bury the prospect of that idea once and for all if we get a reading anywhere close to 2%. This seems rather counterintuitive when you think about it, the idea that the Fed would cut before the ECB when Europe is probably in recession and the US economy is growing at a reasonable rate, albeit at a slower pace than in Q3. Expectations for Q4 are for the economy to have slowed to an annualised 1.9% to 2%, which would be either be the weakest quarter of 2023 or match it. Nonetheless the resilience of the US consumer has been at the forefront of the rebound in US growth seen over the past 12 months, with a strong end to the year for consumer spending. This rather jars against the idea that US GDP growth might get revised lower in the coming weeks as some have been insisting. If you look at the December control group retail sales numbers, they finished the year strongly and these numbers get included as a part of overall GDP. Weekly jobless claims are also at multi-month lows of 187k, and while we could see a rise to 200k even here there is no evidence that the US economy is slowing in such a manner to suggest anything other than a modest slowdown as opposed to a sudden stop or hard landing.  The core PCE Q/Q price index is expected to slow from the 3.3% seen in Q3 to around 2%, which may not be enough to prompt a softening in yields unless we drop below 2%. EUR/USD – pushed up to the 1.0930 area before retreating. While above the 200-day SMA at 1.0830, the bias remains for a move higher towards the main resistance up at 1.1000.  GBP/USD – pushed up towards 1.2775 yesterday with support at the 50-day SMA as well as the 1.2590 area needed to hold or risk a move lower towards the 200-day SMA at 1.2540. We need to get above 1.2800 to maintain upside momentum. EUR/GBP – fell to 0.8535 before rebounding modestly. Also have support at the 0.8520 area, with resistance at the 0.8620/25 area and the highs last week. USD/JPY – finding a few offers at the 148.80 area over the last 3days which could see a move back towards the 146.25 area. A fall through 146.00 could delay a move towards 150 and argue for a move towards 144.00. FTSE100 is expected to open 19 points lower at 7,508 DAX is expected to open 36 points lower at 16,854 CAC40 is expected to open 10 points lower at 7,445.  

Expect the Bank to drop its tightening bias Financial markets expect the Bank Rate to be one percentage point lower in two or three years' time than was the case in November. That will have important ramifications for the Bank’s two-year inflation forecast, which is seen as a barometer of whether markets have got it right on the level of rate cuts priced. Previously, the Bank’s model-based estimate put headline inflation at 1.9% in two years’ time, or 2.2%, once an ‘upside skew’ is applied. We wouldn’t be surprised if this ‘mean’ forecast (incorporating an upside skew) is still a little above 2% in the new set of forecasts. And if that’s the case, it can be read as the BoE subtly pushing back against the quantity of rate cuts markets are pricing in. If that happens, we suspect markets will largely shrug it off. The bigger question is whether the Bank makes any changes to its statement – and its forward guidance currently reads like this: Policy needs to stay “sufficiently restrictive for sufficiently long.” It’s likely to stay restrictive for “an extended period of time.” “Further tightening” is required if evidence of “more persistent inflationary pressures.” We think the baseline assumption going into this meeting is that the last of those sentences gets dropped and that the three hawks who'd been voting for a rate hike in December finally throw in the towel, given the recent run of inflation data. A hawkish surprise is, therefore, a statement that looks much the same as December’s, with at least one or two committee members voting for a further rate hike. A dovish surprise would see the Bank remove or water down the sentence on how long policy needs to stay restrictive. There’s also a tail-risk that Swati Dhingra, known to be the most dovish committee member, votes for a rate cut, though our base case is a unanimous decision to keep rates unchanged (6-3 previously).     Markets seem more sensitive to dovish nuances of late The market discount for BoE rate cuts has moderated. At the end of last year, a first cut by May was still fully discounted, and overall more than six cuts were fully priced in for 2024. This has come back towards slightly more than 50% implied probability of a May cut and four cuts overall being priced in. These are not unplausible scenarios but are obviously dependent on data and, for instance, the government's tax plans. But looking at markets more globally, they appear more sensitive to softer data and any dovish nuances provided in communications. As such, we do see a possibility for front-end rates to tick slightly lower if the MPC, for instance, removes its hike bias - in its commentary as well as the voting split. Further out the curve 10Y gilt yields have risen back towards 4% from around 3.5% at year-end. But yields appear capped at 4%, facing resistance to move higher. If we take a simple modelling approach, augmenting a short-term money-market-based estimate of the 10Y gilt with yields of its US and German bond peers, we conclude that gilts see slightly too high yields already. Keep in mind that the BoE meeting is flanked by the Fed meeting, jobs data in the US, and the CPI release in the eurozone, which should be crucial in driving wider sentiment. When it comes to FX markets, sterling has been the best-performing G10 currency against the dollar this year. Its implied yield of 5.2% means that it is the only G10 currency up against the dollar on a total return basis this year. As above and given that the market is minded to look for the more dovish interpretation of central bank communication in what should be a year of disinflation, the idea of the BoE playing dovish catch-up with the Fed and the ECB could be a mild sterling negative.  That probably means that EUR/GBP will struggle to maintain any break below strong support at 0.8500 in the near term, and the BoE event risk means EUR/GBP could start to trade back over 0.8600.  However, our end-quarter target of 0.8800 looks too aggressive now. Scope for tax cuts in early March, sticky services inflation and composite PMI readings comfortably above 50 in the UK could well mean that EUR/GBP traces out a 0.85-0.87 range through the first half of this year. For GBP/USD, the FX options market currently prices a very modest 42 USD pips of day event risk around the Wednesday FOMC/Thursday BoE meeting. Our baseline scenario assumes GBP/USD could trade back down to/under 1.2700 on Thursday, especially should the FOMC meeting have disappointed those looking for a March rate cut from the Fed.