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Positive start for Europe after more US records

It’s been just over six weeks since the US Federal Reserve raised its key benchmark interest rate and since then the US dollar has been on a slow decline despite the current likelihood that they will raise rates again when they meet in March, and ahead of this week’s meeting which is expected to keep policy unchanged. 

This decline in the US dollar picked up speed last week on concerns that the US could be set on a course to a possible trade war with its partners. These concerns were reinforced at Davos in the wake of comments by the US Treasury secretary as well as his colleague Wilbur Ross, the US Commerce secretary.

President Trump’s speech on Friday did nothing to increase those concerns, but neither did they assuage them. His comments that the US wanted free but “fair” trade suggested that he would not be shy in confronting what he considered unfair trade practices, potentially putting him on a collision course with China, as well as the European Union.

The US imposition of trade tariffs on solar panels and washing machines last week may have been an opening salvo, or it may have been designed to concentrate minds across the world that the US means business.

Either way it is likely to create a much more fluid and volatile environment than the one that has characterised the last few months.

US markets once again shrugged off concerns hitting new record highs yet again, helped in no small part by the weaker US dollar which has declined nearly 5% since the Fed raised rates last December.

A slightly weaker than expected Q4 GDP number from the US didn’t create too much in the way of ripples, however it didn’t dampen expectations of further US rate rises in the coming months, driving US yields to new multi-year highs.

Today’s PCE, personal income and spending numbers for December aren’t likely to diminish the narrative of further US rate rises in the months ahead, as we look ahead to this weeks Fed meeting and US payrolls report. If anything the Fed statement could well be more bullish given the recent passing of the US tax reform bill.  Whether that will be enough to prompt a rebound in the US dollar is anyone’s guess, but it is well overdue some form of rebound.

While US markets set new records again last week, the German DAX also hit a new record peak, however, the rise in the euro to three year highs helped pull it lower on the week, as the strong currency acted as a drag, with the pound doing the same thing to the FTSE100 with both indexes finishing the week lower.

Fridays US surge is likely to see a positive open for European markets this morning, as we look forward to the start of a new week and the end of the month. US stock markets are set for their best start to the year in over 30 years, while the US dollar is on course for its worst start to a year over the same period, yet for all of this positivity Europe’s markets have continued to lag behind.

This is no doubt in some part as a result of the rebound in the euro over the past few months, and some concern that a slowdown of monetary stimulus by the ECB could tighten monetary conditions.

EURUSD – the euro pushed up to 1.2540 last week failing shy of the 1.2600 area and 61.8% retracement level of the 1.3995/1.0340 down move. As long as we stay above 1.2320 the current up move should remain intact, while only a move below 1.2160 would delay it completely.

GBPUSD – topped out at 1.4345 last week before drifting back quite sharply and finding support at the 1.4080 area. Only a move below 1.4030 would suggest that a top is in and a fall back to the 1.3850 area. The 1.4590 area and 50% retracement of the 1.7190/1.1950 down move remains a possibility, while above 1.4000.

EURGBP – has found a degree of support at the previous lows in December at 0.8690 but needs to recover back through the 0.8810 area to spark further gains towards 0.8870. While below 0.8810 the risk is of a retest of the 0.8690 area.

USDJPY – continues to lose ground and while below the 110.10 area the risk is of a return to the 107.30 area and September lows. We need to see a move back through 110.20 to argue for a retest of the 111.00 area.

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