It seems tough to find a narrative that’s supportive of the euro at present, and the threat of an escalation in sanctions is not helping growth prospects in the Eurozone’s powerhouse – Germany. As one would expect other European currencies have followed the euro’s lead, and sterling, in which positioning was most certainly long vs the euro, has been a major victim. The rush to exit longs over the last few weeks has compromised the bearish EUR/GBP trend, and indeed late last week it looked like a bullish head & shoulder bottom had formed with the possibility of a bounce to 0.81 in prospect. The bullish reversal has not been in evidence, at least yet, making me question its likelihood – after all head & shoulders patterns tend to work as reversal patterns roughly two thirds of the time, the other third it’s a continuation pattern. I’m starting to question if we’ve already seen the high for the next few weeks in the cross. In the first instance, I’m happy to maintain a bearish view, but it will be jettisoned if we exceed last Friday’s 0.7997 high. My energies will be focussed on identifying appropriate levels for the bear trend will re-assert itself.
In Europe, this week, the big news will be the BoE August Inflation report and employment report which is published on Wednesday. While we continue to expect downward pressure on the unemployment rate, weaker wage growth may add some uncertainty to the central banks thinking, although it’s hard to see anything but a hike at some point nearer the end of the year.
Risk markets generally have made fairly strong bounces from the troughs we saw last week. However, Japanese equities look a bit uninspired today, but one suspects that a renewal of Japanese yen weakness will solve all problems there. The correction we have seen over the last week in USD/JPY looks to be just that… a correction. That said, I’m not sure that we’ve seen the end to the recent excitement, it’s hard to say how much war risk has impacted sentiment in the markets, but as we’re not out of the woods, where the Ukraine or Gaza is concerned, some caution is warranted. Besides I continue to look ahead to Jackson Hole at the end of the month, to put prospects for risk markets into the end of the year in their rightful context.
I’m not expecting much excitement from US data this week, although we do have Empire and Michigan confidence numbers to look forward to. I just find it hard to see what could come of that to stir the pot. For now I remain distrustful of risk markets generally, with a preference to wait on the side-lines.