Stock markets received a welcome boost during trading on Thursday following the Bank of England’s decision not to change interest rates which eased the ongoing Brexit fears, consequently lifting risk sentiment.
Asian markets were elevated in the early sessions of Thursday after China’s better than expected GDP results alleviated concerns over slowing economic growth in the world’s second largest economy.
Although European markets initially tumbled after the unexpected BoE inaction, most major European equities clawed back previous losses and could be poised to trade higher from Asia’s momentum. Wall Street shocked the markets with most American stocks surging to all-time highs as expectations mounted over global central bank stimulus to quell the ongoing global instabilities.
The stock market rally seems to be powered by optimism over central bank stimulus measures and this questions its sustainability in the long term. With the lingering Brexit uncertainty on the prowl and ongoing concerns over the global economy still present, this amazing stock market upsurge could be a relief rally in disguise that offers bear’s an opportunity to install another round of selling.
China GDP exceeds expectations
Sentiment towards the Chinese economy has displayed signs of improvement with the better than expected Q2 GDP of 6.7% mitigating the recurrent concerns over slowing economic growth. The nation’s ongoing quest for economic stability seems to be bearing fruit, with an array of stimulus measures from Beijing and central bank intervention stimulating domestic growth.
With easing deflationary pressures, subsiding capital outflows and improving factory conditions creating a path to economic recovery, China may be able to respect future growth targets. China’s yuan appreciated the most in a week as China’s improving fundamentals boosted investor attraction towards the currency. Overall, the outlook for China continues to look encouraging as the nation shifts away from manufacturing towards consumption and services.
Pound jumps on BoE inaction
Sterling bears were installed with some inspiration during trading on Thursday following the Bank of England’s unanticipated decision to keeping UK interest rates unchanged amid the ongoing the Brexit anxiety.
The persistent Brexit uncertainty has impacted the UK economy while fears of a potential Brexit fueled recession continues to weigh on sentiment. It seems likely that the BoE could intervene in the future when further economic data provides the clarity needed to take action.
Sentiment remains bearish towards the pound and the relief rally in the GBP/USD could be what bearish investors have been waiting for. From a technical standpoint, the bounce on the GBP/USD could send prices towards the 38.2% Fibonacci of 1.3700 before bears pounce.
Dollar stable ahead of CPI
The dollar has entered a mode of standby ahead of the heavily anticipated CPI and retail sales report on Friday which should offer additional clarity on the health of the US economy. Data from the States continues to follow a positive path with the latest NFP and Beige Book report showing a healthy expansion from mid-May to end of June.
If domestic data repeatedly exceeds expectations then the Fed may be provided a compelling reason to raise US rates in 2016. As of now the major barrier obstructing the Fed is the ongoing Brexit anxieties and concerns over the global economy but if this can subside with time then the central bank may have some hope in taking action before year end.
Commodity spotlight – gold
Gold experienced a decline during trading this week as a mixture of easing Brexit fears, the Bank of England’s inaction and impressive China data elevated risk appetite consequently punishing safe-haven assets. Regardless of these short term losses, this yellow metal remains firmly bullish and the persistent fears over the global landscape could keep prices elevated.
Although there is optimism that US rates could be increased in 2016 after the string of impressive US data, expectations remain somewhat suppressed and this should propel gold higher. Uncertainty remains a recurrent theme in the financial markets and such should bolster gold's allure in the longer term.
From a technical standpoint, prices are trading above the daily 20 SMA while the MACD has crossed to the upside. Gold could be in the process of creating a fresh higher low and a breakout above $1345 could open a path towards $1370.
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