19 October, 2016
Stock markets around the world have reacted positively to expectations that the Federal Reserve will maintain a very slow pace to future US interest rate increases, with investors appearing attracted towards riskier assets and the Dollar also retreating from its recent highs. Aside from the monetary policy outlook, the gains in the US markets are likely linked to the recent earnings reports with many beating estimates and this dispelling previous concerns that the current market valuations are overpriced.
Gains are also being seen throughout Europe and this will likely continue if ECB President Mario Draghi confirms on Thursday that the previous reports about a possible QE taper are premature, while the FTSE 100 in general is still benefiting from prolonged depression in the British Pound. The announcement earlier this morning that the China GDP reading met expectations at 6.7% should provide reassurance that the downturn in growth for the second largest economy in the world is stabilising and prevent further concerns over growth in China slowing down.
The biggest risk to the recent return of positive momentum for the stock markets could be if Donald Trump is declared the winner of the US Presidential debate finale tonight.
UK inflation data steals headlines
The major market news throughout yesterday was that inflation in the United Kingdom has increased by an annualised 1%, representing the strongest reading since November 2014. This coincides with the spectacular fall in the price of oil which led to a period of lower inflation readings. It is important to point out that while many were expecting a higher inflation reading due to the phenomenal fall in the value of the British Sterling since the EU referendum, this was not factored into yesterday’s inflation announcement and this provides another reason to expect even strong inflation numbers over the coming months.
The GBPUSD has rebounded as strongly as 1.23 on expectations that higher inflation will limit the probability of the Bank of England (BoE) easing monetary policy once again before the end of the year. The expectations for further falls in the British Pound are still strong and the recent rebound is likely being seen by investors as an opportunity to reload selling positions with the Brexit uncertainty sure to dominate headlines and weigh on investor sentiment for many months to come.
Dollar/Yen looking at risk
The Dollar/Yen has commenced the new trading week to two days of consecutive losses and dipped briefly below the 104 handle yesterday after reaching a two-month high late last week. The buying momentum in the Dollar/Yen is beginning to fade and potential sellers are likely in a wait-and-see mode. The USDJPY really needs to close above 104.50 soon to confirm any chances of a further bullish reversal, otherwise there is a risk of the pair reversing its gains seen earlier in the month.
Gold consolidates above $1250
After unexpectedly crashing through the psychological $1300 support level early in October and falling to its lowest level in two months marginally above $1240, Gold is now showing signs of consolidation above $1250. Gold should also be benefiting from the Dollar retreating and the markets expecting a slow pace of monetary tightening from the US Federal Reserve, meaning that it is possible that Gold could attempt a move towards $1270 and maintain the level around $1250 as its new support zone.
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