Equity markets had one of those weeks last week where we saw conflicting signals as to whether we can expect to see further gains for stock markets, or whether we could be vulnerable to a sharp sell-off.
Central banks who for so long have been the guardians of the move higher in stock markets appear to be undergoing a change of tone, with last weeks Fed rate rise coinciding with a surprise split at the Bank of England about the merits of a rate rise, while it is widely perceived that the European Central Bank may not be too far away from pulling back from its own very easy monetary policy stance, as investors get used to the idea of the punchbowl being slowly taken away.
This uncertainty may help to explain why, despite more record highs last week for the German DAX, and the Dow Jones, the Nasdaq finished lower for the second week in succession as did the FTSE100.
After a central bank bonanza last week, this week has an altogether quieter feel to it, though politics could well continue to play a part, in the absence of any meaningful economic data, with the euro getting an early lift after the second round of French parliamentary elections at the weekend.
At the weekend new French President Emmanuel Macron reinforced his position in French politics with a landslide win for his new parliamentary party in the second round of the latest parliamentary elections, and thus gaining a solid mandate in order that he can start the process of implementing significant reforms to the French economy.
It has taken the new French President less than 18 months to shakeup French politics taking a political movement that didn’t exist at the beginning of 2016, to a parliamentary majority, and a mandate to try and start a process that has eluded French politicians for the last forty years.
Macron will need to tread carefully, with some questioning the validity of his mandate on a 45% turnout, the lowest in fifty years. He will also face an enormous amount of resistance on the ground from the vested interests of the trade unions which still wield an enormous amount of influence, and could make life very difficult for the inexperienced new President and his party.
Here in the UK the government here can only dream of the type of majority given to the new French President with the first day of Brexit talks scheduled to convene today in Brussels, almost one year to the day that saw the vote to leave the EU come to pass. The initial tone of these talks could well offer significant clues as to how long, protracted and adversarial they are likely to be.
The future of UK Prime Minister Theresa May continues to be shrouded in uncertainty as whispers continue to grow as to the length of her tenure, ahead of this week’s scheduled Queens Speech.
Amidst the background noise and political fall-out of the Grenfell fire tragedy these jitters could manifest themselves in the performance of the pound, if the government fails to get to grips with the current narrative, as well as ensuring the Queens speech gets the required number of votes.
EURUSD – continues to trade between the 1.1120 area and the highs just below the 1.1300 area. A move below the 1.1100 area could well signal a double top reversal which could signal a potential move towards 1.1020 in the short term, and then 1.0900. Resistance remains back up at the 1.1300 area.
GBPUSD – while the pound remains below the 1.2820 area and the 50 day MA we remain susceptible to further losses. It currently remains corralled between this resistance area and support just above the 100 and 200 day MA’s as well as the 1.2635 area. A move through 1.2830 argues for a retest of the 1.2920 area.
EURGBP – found support at the 0.8720 level last week and this needs to hols for the current up move to continue, towards the 0.8820 area, and then 0.8920. A move below here could well see a retest of the 200 day MA at 0.8615.
USDJPY – having moved back through the 200 day MA the US dollar fell short of the 111.60 area, and this month’s high. While below this key level the US dollar remains vulnerable to a move back below 110.50 on the way back to last week’s lows at 108.80.