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Europe to open flat ahead of UK and US Q1 GDP

Despite market disappointment with the lack of detail surrounding President Trump’s tax plan US markets still managed to finish the day higher with yet another record for the Nasdaq as markets once again front ran good tech company earnings, this time from Amazon, Microsoft and Alphabet (Google) who all beat expectations after the closing bell.

European markets recent winning streak came to an end yesterday despite the ECB striking an unexpected shift in tone with respect to recent economic data in the euro area. At yesterday’s press conference while ECB President Draghi wasn’t exactly effusive about the recent recovery he was forced to acknowledge that downside risks had diminished, as the bank left policy unchanged.

The strength of recent economic data was always going to make it difficult for the ECB to be too downbeat, however Mr Draghi’s get out of jail free card was, as expected, the weak inflation outlook, particularly core prices which are still below 1%, and he used it to good effect.

The last thing the ECB wants is the markets front running a higher euro and a rise in yields, particularly given that Italy has several billion euros of bonds that need rolling over in the coming weeks.

While the ECB President was able to keep a lid on the euro yesterday with his concerns about weak inflation a move higher in the latest CPI data out later today could well undo all of that, particularly if core prices jump back up, which they are expected to.

Today’s flash EU CPI numbers are expected to rebound from the 1.5% seen in March to 1.8%, while core prices are expected to hit 1%, up from 0.7%.

It’s also set to be an important day for Q1 GDP numbers from both the UK and the US, and while we’ve seen the economic recovery show significant signs of firming in the first part of this year, it’s been a slightly different story in the UK and the US, where growth has shown some signs of tailing off, due to rising prices relative to incomes.

The pound after a halting start to the year does appear to have found a bit of a base, in spite of some softness in some of the recent data, however it did get a lift from some better than expected April retail sales data yesterday.

Later this morning, we get the first iteration of UK Q1 GDP and this is expected to show that the UK economy slowed from the 0.7% seen in Q4 to 0.4%, with services in particular expected to be a little on the soft side, with index of services expected to reflect that. On an annualised basis the GDP numbers are expected to firm up a little from 1.9% to 2.2%.

In the US it’s expected to be a similar story with a slowdown from Q4’s 2.1% to 1.2%, with personal consumption likely to show significant weakness from the strong showing of 3.5% in Q4.

EURUSD – having held above the 1.0820 area earlier this week as well as the 200 day MA we look set to move higher, moving above the 1.0940/50 area and potentially closing in on the 1.1000 area, and towards the November peaks at 1.1300.

GBPUSD – continues to remain well supported making a new high above 1.2900 yesterday, with the bias remaining towards 1.3000 and the 1.3300 area. A move below 1.2750 argues potentially back towards the 1.2600 area.

EURGBP – yesterday’s decline helped fill the gap from this week’s gap higher. With support at the 0.8410 area we could well get a rebound back towards the 0.8480 area. The big resistance area remains just below the 0.8570/80 area where the 50, 100 and 200 day MA’s converge on each other. A move back below 0.8400 reopens last week’s low at 0.8305.

USDJPY – having briefly pushed through the 111.60 area yesterday we need to gain a foothold above it to argue for a move towards 112.50. Whilst below it we remain vulnerable to a drift back down towards the 110.50 area and even 109.20.

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