Europe to open higher as the pound slips

The following guest post is courtesy of Michael Hewson, Chief Market Analyst at CMC Markets. More of Michael’s research and analysis can be found at CMC’s website here.


After a pretty turbulent start to 2016, European equity markets enjoyed the rare luxury of a positive week last week, despite a negative finish on Friday, with banking stocks posting their first positive weekly finish this year, while mining stocks posted their fifth successive weekly gain in a row.

Michael Hewson, CMC Markets

Michael Hewson, CMC Markets

Even oil and gas stocks finished the week in positive territory, despite the fact that oil prices finished the week lower, as the so called Saudi, Russia oil deal lost some of its significance.

As far as this week is concerned the cues are slightly more negative as markets in Europe look to open lower, ahead of some key preliminary manufacturing and services PMI data from France and Germany for February.

Amidst concerns that growth is stalling in Europe’s two largest economies weaker readings here are likely to reinforce the narrative that current ECB monetary policy is not having the effect policymakers want it to.

Cutting rates into negative territory may have the intention of pushing banks to lend money, but they aren’t likely to do that if they have large numbers of non-performing loans or have to improve their capital positions, due to higher capital requirements.

The French manufacturing sector is expected to slip back to 49.9 from 50, while the services sector is expected to show a slight improvement to 50.4 from 50.3.

Germany’s economic activity in February is expected to soften slightly with manufacturing expected to slip to 52.1 from 52.3 and services to 54.8 from 55.

BrexitThe pound has taken a bit of a tumble overnight in the wake of the announcement that the UK EU referendum date would take place on 23rd June, and the news that London Mayor Boris Johnson was going to campaign for Britain to leave the European Union, along with six other UK cabinet ministers.

While the news that Boris Johnson is backing a vote for “Brexit” is undoubtedly a coup for the so called “outers” it really shouldn’t really be that much of a surprise given his reputation as a bit of maverick, and the fact that the deal reached by Prime Minister David Cameron contained so few significant reforms.

There is also the small matter that the vote remains four months away, and while the wait is likely to create some uncertainty about the UK economy, it is one of many factors troubling investors right now, including China’s economy, the effect on emerging markets, as well as the current negative interest rate policy of the ECB and Bank of Japan, not to mention the problems surrounding Europe’s banking system.

EURUSD – while the 200 day MA at 1.1050 holds the bias remains towards the upside and move back towards the 1.1400 area. A move back below 1.1040 could well see a revisit of the 1.0970 level.

GBPUSD – the outlook for sterling remains cloudy despite a late rebound towards the end of the week. The 1.4220/30 area continues to act as decent support but we need to push through the 1.4410 area to stabilise for a return to 1.4600. A move below 1.4210 suggests a return to the lows last month at 1.4090.

EURGBP – currently trading between the 0.7690 area and the recent highs towards the 0.7860 area, there is a risk we may be building up a bit of a top. A slide below the 0.7690 area in the short term, could see a move towards the 0.7520 area. The 200 week MA is the key resistance on the upside at 0.7945.

USDJPY – this month’s break below the 116.00 area now opens up the prospect of a larger move lower to 106.00, completing a year-long consolidation period.  For this risk to diminish we would need to see a strong recovery back through the 116.00 area.

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