FTSE -16 points at 7388
DAX -49 points at 12538
CAC -10 points at 5220
Euro Stoxx -11 points at 3505
Today could be a make-or-break day for cable. On Friday, the GBP/USD cleared a critical resistance at 1.3045, which stood for the major 38.2% retracement on the post-Brexit sell-off. The positive breakout has been caused by the heavy sell-off in the US dollar. As a result, the pair is considered in a mid-term bullish consolidation zone prior to the critical inflation data.
The UK will release the June inflation data today. According to analysts, the headline inflation may have steadied at 2.9% last month, just shy of the critical 3% level, above which the Bank of Governor (BoE) Mark Carney will be asked to write an open letter to the Chancellor to explain the reasons behind the significant deviation from his 2% mandate target.
Therefore, an inflation read exceeding the 3% level in June will likely resuscitate the BoE-hawks and could trigger a decent rally in the pound markets. The UK gilt curve steepened significantly over the past month due to escalating worries regarding the rising inflation. The 10-Year gilt yield surged more than 25 basis points and the probability of a December rate hike increased to 50%.
In opposition, a softer-than-expected inflation would give reason to the BoE Governor Mark Carney, who has been predicting a slowdown in inflationary pressures due to the decline in real wages. If this is the case, the BoE-doves shall return in force and pull the pound below the $1.30 level against the greenback.
In the US, the probability of a December rate hike fell to 42.3% in the aftermath of a series of soft macroeconomic data. As the reflation trend triggered by President Trump’s fiscal promises are waning, the Fed hawks are losing field. The slowdown in the US inflation, which was first thought to be temporary by the Fed, appears to be turning into a medium term trend. In her semiannual testimony last week, the Federal Reserve (Fed) Chair Janet Yellen also voiced her doubts about the Trump’s administration capacity of bringing the fiscal reforms to life and reaching the 3% growth target.
The sell-off in the US dollar continued on Monday, as the empire manufacturing data has been a decent miss in July. News that two more senators announced their opposition to the Republican healthcare bill further dented the investor appetite across the US markets.
The Dow Jones (-0.04%) and the S&P 500 (-0.01%) saw no enthusiasm. The US 10-year yields slipped below the 2.30% level.
Gold is preparing to test the $1,240 (major 38.2% retrace on June-July fell) on the back of lower US yields. Surpassing this level should suggest a short-term bullish reversal and encourage a further rise toward $1,247 (50, 100-day moving average) and $1,250 (50% retrace).
The EUR/USD rallied on stops after breaking the 1.15 level on the back of a broad-based USD unwind. Trend and momentum indicators are comfortably positive for a further development of the bullish trend, yet the uncertainties prior to the European Central Bank meeting will certainly keep the upside potential limited. The next important resistance is eyed at 1.1616, the 2016 peak. Support to the current trend stands at 1.1446 (minor 23.6% retracement on June-July rise) and 1.1394 (major 38.2% retrace). Decent call option is eyed at 1.1535 at today’s expiry.
Nikkei (-0.68%) and Topix (-0.40%) were offered on stronger yen, as Japanese traders returned from the Marine Day break. The USD/JPY broke the major 38.2% retracement support (112.32) on June – July rise and extended gains to 111.99. The USD weakness is the main cause of the current drawback. Nonetheless, the divergence between the Fed and the Bank of Japan (BoJ) policy outlooks is still supportive of a stronger USD/JPY. Traders should be seeking dip buying opportunities as soon as the USD sell-off loses momentum.