European Open Preview – Sterling rebounds, turns its sights to UK services PMI

XM Market Review
XM Market Review

Here are the latest developments in global markets:

  • FOREX: The US dollar index is down by a little over 0.2% on Wednesday, extending some of the losses it posted yesterday on the back of declining longer-term US Treasury yields. The yen enjoyed some haven demand amid trade tensions, while the pound was buoyed by some hawkish rhetoric from the BoE and an encouraging UK construction PMI.
  • STOCKS:Wall Street gave up early gains on Tuesday, to close lower. The drop was led by the tech sector and was triggered by reports China had banned US chipmaker Micron (-5.5%) from selling in the country. The tech-heavy Nasdaq Composite fell by 0.86%, while the Dow Jones and S&P 500 followed suit, closing down by 0.54% and 0.49% respectively. US markets will remain closed today, in celebration of the US Independence Day holiday. Asia was mostly lower on Wednesday, with Japan’s Nikkei 225 falling by 0.31% but the Topix rising by a modest 0.03%. In Hong Kong, the Hang Seng remained under pressure, tumbling by 1.26%. In Europe, all major indices are set to open lower today according to futures, albeit not significantly so.
  • COMMODITIESOil prices went for a ride yesterday. WTI climbed initially to touch a fresh multi-year high of $75.27, before it suddenly fell off the cliff. It violently dropped to $72.70 in a matter of minutes, only to recover most of its losses in the following hours to trade more or less unchanged in the day. WTI and Brent crude are higher by 0.5% and 0.6% respectively today, with the fact that investors were so quick to buy the dip in prices yesterday underscoring once more the bullish sentiment currently surrounding energy markets. In precious metals, gold is nearly 0.6% higher today, currently trading just above the $1,258 per troy ounce level. The area around $1,238 proved its validity as a strong support barrier yet again, with the metal’s rebound also aided by the correction lower in the US dollar (the two are inversely related).

Major movers: Risk appetite remains shaky amid trade fears; sterling rebounds

Another volatile day in markets yesterday, with rapid shifts in risk sentiment amid headlines suggesting the US-China trade standoff is escalating. While the European session Tuesday was largely characterized by a risk-on tone, with EU equity markets and high-yielding currencies like the Australian dollar recovering ground, the party did not last.

Risk appetite turned sour after headlines suggested a Chinese court had temporarily banned US chipmaker Micron (-5.5%) from selling in China over a patent case. Considering this came just one day after the US blocked China mobile from operating in the country, citing national security risks, it was likely seen as a retaliation tactic, playing into the narrative that trade tensions are set to escalate further. US stock indices, which had been trading higher up until that point, turned down to close lower overall, weighed by tech stocks. Meanwhile, safe-havens like the Japanese yen and US Treasuries attracted some demand. Dollar/yen is also 0.2% lower today, trading near a one-week low of 110.35.

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In the UK, sterling rebounded on Tuesday following some hawkish remarks from BoE MPC member Saunders and a stronger-than-anticipated construction PMI for June. Saunders said rates may need to rise faster than markets anticipate. While his comments are hardly surprising – he has voted for a hike at recent meetings –, investors still took the opportunity to buy the pound. Moving forward, the services PMI today may be decisive in shaping market expectations for a BoE rate increase in August, currently priced with a 50% probability (UK OIS). Beyond that, all eyes are on Brexit, where uncertainty still reigns, with Theresa May set to release a much-anticipated White Paper after she meets with her cabinet this week.

In commodity-linked currencies, aussie/dollar is 0.3% higher today, following a beat on Australia’s retail sales data for May released overnight. The RBA is concerned about a potential slowdown consumer spending amid high household debt levels, so the strong print likely relieved some worries. That said, the aussie likely remains vulnerable to trade-war headlines, given Australia’s reliance on commodity exports. Kiwi/dollar is also up by 0.37% and looks set to post a second day of gains, which hasn’t happened in a month. Dollar/loonie is down by 0.1%, with the loonie continuing to draw support from higher oil prices and heightened expectations for a BoC rate hike next week.  

Day ahead: UK services PMI on the agenda

US markets being closed for the Independence Day holiday renders Wednesday a relatively quiet day. Still some European releases that include the services PMI print out of the UK will be attracting interest.

The final readings for June’s services and composite PMIs will be made public out of the eurozone at 0900 GMT. They’re expected to be confirmed at 55.0 and 54.8 respectively – a number above 50 denotes sectoral expansion. Germany and France, the eurozone’s two largest economies, will see the release of their corresponding PMI figures a few minutes earlier; France at 0750 GMT and Germany at 0755 GMT.

At 0930 GMT, the UK will be on the receiving end of its own services PMI data for June. Unlike the eurozone, this is the one and only release (i.e. no flash estimates are released for the UK), something which might render the print more market sensitive. Projections are for the release to stand at 54.0, the same as in May.

The manufacturing and construction PMIs out of the nation earlier in the week managed to beat expectations. Should the same happen for the services sector, which by far constitutes the largest fraction of the UK economy, then the case for a rate hike by the Bank of England during its August meeting may start receiving traction, consequently supporting sterling. The opposite holds true as well though. Currently the odds for a rate increase run at 50% according to UK overnight index swaps.

Meanwhile, the trade standoff between the US and China remains in the background; July 6 is the date US tariffs on $34 billion worth of Chinese goods will go into effect. The yuan has managed to gain some ground on the back of comments by PBOC Governor Yi Gang after recording an 11-month low versus the dollar on Tuesday.

Technical Analysis: GBPUSD looking bullish in the short-term at one-week high

GBPUSD has posted considerable gains after reaching an eight-month low of 1.3048 in late June. Currently the pair is hovering near a one-week high of 1.3227 hit earlier on Wednesday. The positively-aligned Tenkan- and Kijun-sen lines are projecting a bullish picture in the short-term. This view is also supported by the rising RSI.

A stronger-than-anticipated services PMI reading out of the UK is expected to boost the pair. Immediate resistance seems to be taking place around the current level of the 100-period moving average at 1.3231. Notice that the area around this level (especially 20-30 pips above) was congested in the past. An upside break would start to increasingly bring into view the 1.33 round figure.

Conversely, a data miss is likely to weaken GBPUSD. Support to declines could come around the 50-period MA at 1.3189 which was violated on the way up earlier in the day and may instead act as support. The area around this point also includes the Ichimoku cloud top (1.3208) and bottom (1.3194). Further below, additional support might come from the Tenkan- and Kijun-sen lines at 1.3170 and 1.3137 respectively.

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