It was another roller-coaster week for Europe’s markets last week, reversing all of the gains seen in the previous week and finishing on the lows on news out of the US that President Trump’s ex national security adviser Michael Flynn had pleaded guilty to lying to the FBI. It was also reported that he was prepared to testify that the President had directed him to make contact with the Russians in the lead up to last year’s Presidential elections.
This unexpected revelation has once again raised the prospect that the President might be at risk of being impeached if the allegations are proven. In any case whatever happens next it is likely to take some time for events to play out which suggests that the US President is unlikely to be going anywhere soon.
While equity markets and the US dollar dropped sharply on the Flynn reports, US markets soon regained most of their losses on reports that Republican senators had managed to collect enough votes to pass the Senate tax bill, The subsequent signing of the bill at the weekend, while welcome doesn’t mean that it’s a done deal, as it now has to go through the House of Representatives but the passing of a final bill now appears a lot closer than it did a few days ago.
The late pullback from the lows on Friday in anticipation of an agreement and subsequent ratification is likely to help with a strongly positive open in Europe this morning, as well as for US markets later today, however investors still appear to be ignoring the prospect of a government shutdown in the event of a failure to raise the debt ceiling in a few days time.
With US markets showing no signs of slowing down, it’s once again set to be another week of important economic data, culminating in the latest US employment report for November on Friday.
It’s also set to be another big week for the pound, coming off the back of four successive weeks of gains against the US dollar, as UK Prime Minister Theresa May heads for Brussels, for a meeting with European Commission President Jean Claude Juncker.
Having come under fire from some quarters for agreeing a figure of up to €50bn to settle UK obligations with respect to a so called divorce bill, the UK government have been given a deadline of today to come up with proposals with respect to the Irish border issue. This is in order for there to be a chance to move onto trade talks when EU officials meet later this month.
Last week Donald Tusk, the European Council President on a trip to Dublin to show solidarity with Ireland cranked up the pressure by giving the Irish government an effective veto on any proposals put forward by the UK. It has been suggested that this showed that the EU were as united as one behind the Irish government.
His insistence that the UK’s future lay in the hands of the Irish may well have been an attempt to increase the pressure on the UK, but it also raises the stakes for Ireland, whose economy would take a huge hit if talks were to break down, especially if the UK were to then withdraw its €50bn offer.
At the risk of being cynical it also gets the EU off the hook, because they can then blame Ireland if the talks were to hit a wall at this stage.
On the data front the UK economy has managed to remain fairly resilient, with manufacturing PMI for November beating expectations, reaching a four year high of 58.2, with output and employment both rising sharply, while investment goods and new orders rose at their steepest pace since 1994.
Construction has been a bit of a weak spot in recent months with the PMI slipping into contraction a couple of months ago before recovering slightly in October. The recovery is expected to continue in November, with a rise from 50.8 to 51.2.
EURUSD – continues to find it heavy going above the 1.1950 area with resistance up near the 1.1970 area. We have solid support down near the lows last week at 1.1810, and also below that at 1.1710.
GBPUSD – found resistance at the 1.3550 area last week, with longer term resistance behind that at 1.3660, the September highs. The current up move could be vulnerable to a sell-off at these levels though we do have support at the 1.3430 area and 1.3320.
EURGBP – has continued to find support down near the 200 day MA but needs to take out the November lows at 0.8735 to suggest the possibility of further losses towards 0.8600. We have resistance back at the 50 day MA at 0.8880, and above that at the 0.8980 area.
USDJPY – has managed to push through the 112.80 level and 50 day MA but it needs to break beyond the 113.20 level to open up a move towards the 114.00 area. Support comes in at the 111.60 area.