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Lower open for Europe after US gains evaporate

When US markets opened yesterday after two weeks of strong gains returning from the long weekend break, it looked to all intents and purposes as if US investors were intent on carrying on where they left off last week. The Dow surged through the 26,000 level, the S&P500 poked its head above 2,800 and the Nasdaq also posted new record peaks.

For all of that early optimism sentiment started to turn around and we started to see a sharp sell-off with the Dow falling peak to trough, by 383 points, before closing the day 10 points lower from where it finished last Friday.

There wasn’t any immediate catalyst for yesterday’s sharp sell down apart from some weakness in commodity markets, but US markets inability to hold onto these sorts of gains might suggest that we could be due some sort of pullback, after the strong start to this year. Either that or investors are starting to get a little nervous ahead of a possible US government shutdown at the weekend.

At any rate last night’s sharp turnaround in US markets is likely to weigh on European markets this morning with a lower open, after a failure yesterday to consolidate what were at one point similarly strong gains.

The FTSE 100 finished the day lower yesterday after a strong sell-off in commodity prices saw Brent crude oil prices fall back below the $70 a barrel area, though we do seem to be finding support around $69 a barrel for now.

The recent cold weather has seen US oil production stall in the last few weeks, helping drive up the price, however expectations that US production could rise to over 10m barrels a day in the coming months is prompting some caution at these levels.

A sharp fall in copper and palladium prices also weighed on the mining sector.

The euro had a rather mixed day yesterday, slipping back on reports that the ECB wouldn’t be modifying its policy message at next week’s rate meeting. This was never a likely outcome but the recent rise in the euro in recent days had been predicated on a belief that the ECB might revise its policy message with respect to bond buying sometime early this year.

Today’s EU CPI numbers should knock that particular idea on the head in the short term when it is expected that December CPI will come in at 1.4%, with core prices at 0.9%. With headline inflation at these levels and the euro much higher than it was in early December it is likely that inflation will remain constrained and this is one area the ECB does have a concern, particularly since the ECB’s inflation forecast is set against a EURUSD rate of 1.1800.

The pound could also react to a speech today by Bank of England MPC member Michael Saunders, given yesterday’s rather mixed inflation numbers. He was one of the first MPC members to break ranks last year, in pushing to reverse the August 2016 rate cut. If he is any way hawkish with respect to the prospect for further rate rises we could see further sterling strength.

Later on today the Bank of Canada is expected to raise rates by 25 basis points to 1.25% in the face of a strong Canadian jobs market, which saw unemployment drop sharply in December to 5.7%, following on from strong jobs reports in October and November, while manufacturing prices have also been showing signs of strength.

A move today would follow on from the two quick rate rises we saw last year and also bring the headline rate back into line with the recent move by the US Federal Reserve, when the US central bank raised rates in December.

There is an outside chance the Bank of Canada might delay a possible rate move, over uncertainty about the status of the NAFTA negotiations, but it’s not a high one. It is more likely they will issue a cautious statement about the economy, tailoring expectations of a wait and see outlook.

EURUSD – the euro spent most of yesterday holding above the 1.2200 level and below 1.2300. The bias remains for a move towards the 1.2600 area and 61.8% retracement level of the 1.3995/1.0340 down move. Support should come in at 1.2170 the 50% level and the previous peaks at 1.2090.

GBPUSD – while below the 1.3830 area there is a risk of a slide back towards the 1.3650 area and or 1.3500. A move through 1.3830 has the potential to test the 1.3980 area which is a 38.2% retracement of the 1.7190/1.1950 down move..

EURGBP – currently being capped by the 100 day MA at 0.8910 and needs to close above that to open up the 0.9000 area. While below last week’s highs the risk remains for a return to last week’s lows at 0.8805/10 and a return to the recent range lows at the 0.8740 area, with a close below targeting a move towards 0.8650.

USDJPY – has moved below the November lows and could well head back towards the 109.70 area, with support also at the 110.10 level. We currently have resistance at the 111.50 area as well as the 112.00 level.

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