Some potential market movers today. Earnings numbers from Goldman Sachs and JPMorgan Chase, as well as numbers from both Intel and Johnson & Johnson. Individually these are important companies, taken together their results will start to clarify the picture for this earnings season. With regards to Goldman Sachs and JPMorgan Chase, if they post upside surprises like Citibank did then that will be a boost to risk. Intel’s numbers will give us an insight into the technology sector and plans for future corporate investment. But that’s not all, we have retail sales today, and perhaps most importantly, we have the testimony of the chairwoman of the Federal Reserve.

If Yellen does any less than reiterate her dovish view that there’s still plenty of slack in the labour market, traders will view it as an implicit change in the monetary policy outlook, perhaps a hint that the first hikes will be earlier than current expectations – think ‘exit strategy’. That would be a negative for risk as US markets look fully priced, and they have to be vulnerable to any changes in monetary policy. Make no mistake, that scenario would be bigger news than anything else that is likely to happen today.

GBP/USD bounced nicely off former resistance, turned support on the back of the inflation numbers which have just come out this morning, and EUR/GBP pulled sharply back from the highs (the resistance area I identified yesterday). Consumer prices rose to 1.9%, above the consensus expectations of 1.6% after May’s 1.5% number. Again… read exit strategy. Tomorrow’s employment numbers could add further fuel to sterling strength if the unemployment rate is below consensus.

Markets today should generally be cautious, in front of the big data. Traders are likely to pare their positions in order to manage risk, and wait to assimilate new information. The key is likely to be Yellen. While markets ended yesterday on a positive note, it’s worth pointing out that the Bank of Japan has lowered it fiscal year2014 forecast, and some banks have lowered Q2 estimates for the Eurozone. There’s ample liquidity out there, but it’s not all rosey in the garden. If the markets weren’t already so high, I would view this as the kind of environment where there’s just enough information out there to keep the sceptics cautious about markets, and enough looseness in financial conditions to allow the markets to keep grinding higher. But let’s wait and see what happens later on today!

Short one today. We’re now into earnings season. What happens in corporate US matters, as the US remains the largest economy in the world and it’s macro picture has a significant impact on perceptions of risk and sentiment in general. Data that surprises could cause short term spikes in volatility, but unless a theme can be divined from earnings or sales data that contradicts the current macro narrative we shouldn’t expect a broader impact. This is the ideal domain for range traders, a highly specialised market, that can be difficult to profit from.

Majors continue to trade within defined ranges. EUR/GBP looks to be approaching first minor resistance levels {0.7970ish}, and with cable (GBP/USD) bouncing off trend-line support, we could see sterling appreciating versus its main crosses, but all of this feels within the context of the ranges. USD/JPY also looks like it could bounce from supports {101.20ish}.

Bigger picture technicals continue to concern me, but I have enough self-awareness to appreciate my personal biases. Some traders are more comfortable in bull markets, others like me prefer bear markets for the winning trade. We all tend to “see” what we want to see. For now we need to continue to monitor the macro-scope, if we identify any factors that could impact the normalisation narrative that dominates then perhaps we (or I) can give in to bias! Rest assured if we spot anything we will update you in our blog.

Fears about Banco Espirito Santo (BES) one of Portugal’s largest banks did some damage to markets yesterday. Stocks were lower, EUR/USD dipped back below 1.36. It seemed like we were back to 2012 and with concerns about the health of European financials, but look where we are this morning – it’s like it never happened. Had this been back a couple of years ago – before Draghi put his foot down – the panic would have been feeding on itself by now, with senior figures across Europe announcing emergency meetings. But this isn’t 2012, this is 2014, and Draghi has been extraordinarily effective – a central banker not to be messed with. It seems clear the short term players were short euros when the rumours about BES got out, thus the dip was an opportunity for those guys to get out, take a step back and wait for better levels to get back in.

Yes the trend for EUR/USD looks to be down, but I’m guessing the smart guys will wait for the panic sellers of yesterday to capitulate and stop out of their positions. Where that level is could be 50 or so pips higher than where we are, it’s hard to be precise, but my sense is that there are stops a bit higher than where we are now. What that means is we should probably see higher levels today, but it will be a very short term thing with the pair moving back to pre- BES levels in short order. Personally I prefer EUR/GBP for expressing a short euro view… you take the dollar out of play. I wouldn’t be expecting major things to happen over the summer months though, it tends to be like that unless we’re in crisis mode. And it seems like Portugese banks are not enough to do more than momentarily perturb the market now.

In my view, we need to look out towards events like Jackson Hole in August – the annual economic symposium where central bankers often make key speeches; and the return of the big players from their holidays in September, for the market to make an assertive move in one direction or another. We could be in for a directionless market until then with ranges large enough to discombobulate, but not so big it makes us question the dominant narratives.

The recent release of the latest FOMC minutes was fairly dull to be honest, but it did strike me as interesting that both the Bank of England (BOE) and now the Federal Reserve have commented about the complacency of investors regarding when hikes are likely to start. Janet Yellen noted “pockets of increased risk-taking across the financial system”, well Janet…. who’s fault is that? The more easy money there is washing around in the system the lower volatility is likely to be. And folks? Vols are pretty darn low in aggregate!

Regardless of who’s fault it is though, major central banks are telling us that we’re at the beginning of the endgame of this zero interest rate policy (ZIRP) world we’ve been living in. Whether it’s the 3^rd quarter next year or the beginning of the year after, rates in major markets (Japan and Europe possibly excepted) need to start to go up. Markets and investing are obviously expectations based when in rational mode, but there’s the darker side of our collective consciousness which is dominated by greed and fear. Greed is definitely in the ascendancy right now, but if.. and this is what central bankers are worried about… the collective fails to properly factor in the end of ZIRP into expectations, we’ll get a negative surprise when the easy money disappears. When that happens fear will dominate and the mob is much harder to control or predict.

What can we take from this? I think markets need to have slightly more aggressive expectations of higher rates in the UK and US over the next 12 to 18 months. This will be a cushion for both GBP and USD. It doesn’t have to end in tears for risk. You can have rates going up and benign markets, as long as you have real sustainable growth.

Keep an eye on Japan. 2 months of ugly ugly machinery orders now. This is not good, yes it’s a volatile data point, but these are the core numbers that strip out the most volatile components. If you ever needed examples as to why QE may not be the panacea it’s cracked up to be, Japan is the perfect case study!

Anyway it would be unfair to pick on disappointing Japanese macro. Manufacturing data out of Italy, France and a few days ago the UK, hasn’t exactly been inspiring. We all want to think this phenomenon (poor manufacturing/ industrial production data) of the short term variety and not affecting the bigger picture macro. Too soon to tell. You’ll note I’m only mentioning today’s BOE monetary policy decision at the end of the blog. I really don’t see anything new coming from it and clearly the market doesn’t either, because GBP is not doing much of anything this morning!

You only have to look at the Galliford Try record profits from home building to appreciate that the UK economy continues to thrive, disappointing industrial production numbers yesterday cannot obscure this fact. In any case industrial production can be volatile, you need a few months of negative surprises to identify a change in trend. The bottom line is Galliford Try’s numbers surpass pre- 2008 levels and their construction order book has improved.

On a more sobering note, I’ve noticed stories from esteemed outfits – Bloomberg, Wall Street Journal and the like – openly discussing the possibility of a melt up in equities. Suddenly people are talking about average annual returns of 10.5% on the Dow and the industrial average reaching 44,000. For those who haven’t noticed it, recently achieved the 17,000 level a new record. Why am I cautious? When a consensus builds that markets are going one way… and one way only… the smart investor should be cautious! One of the great investors once said (and forgive me if my quote isn’t verbatim) “be greedy when others are fearful, and fearful when they’re greedy”. I’m not saying it’s that time yet.. markets can persist for a long time before the trend changes, but I always try to keep an eye out for the warning signs. Technical analysis can probably help identify specific levels to keep in mind, but a general feel for sentiment and the underlying macro-picture can alert you to when you need to start looking.

What does this mean for currencies? I would expect the trend of sterling strength and euro relative weakness to persist. I would also expect the more risky (higher yielding currencies) to perform well. But shorter term pullbacks are a part of the game, markets don’t move in straight lines, as we can clearly see from recent equity market pullbacks (the Dow is back below 17,000). I don’t expect weakness to persist for long (and we are coming up to earnings season after all), but these are the lazy summer months, the big boys are out in the Hamptons, or on their yachts so don’t expect too much excitement for the next while. What goes for equities and risk in general goes for currencies as well.