Despite Friday’s weakness European markets still managed to finish the week higher, with the FTSE 100 finishing higher for the second week in a row. For US markets it was a week of two halves, with a decent first half undermined by two days of sharp losses, which were prompted by an unexpectedly hot January CPI report, which saw US inflation surge from 7% in December to a new 40-year high of 7.5%.
Last week’s inflation report appeared to spook St. Louis Fed president James Bullard, who said that he favoured a 50bps hike in March, with two more of 25bps each by July, while also suggesting that the central bank should hold an emergency meeting and hike early. Not surprisingly these comments prompted a sharp rise in bond yields across the board, and while other Fed members appear to be more relaxed about recent data, there is little doubt that the possibility of a much more aggressive Fed response on rates is already getting priced into markets.
At the weekend, Mary Daly of the San Francisco Fed was slightly more cautious, saying a too aggressive approach to monetary policy could be destabilising all by itself. This caution also chimed with comments at the end of last week from Loretta Mester of the Cleveland Fed and Raphael Bostic of the Atlanta Fed, who expressed reservations about a 50bps move, although they were both careful not to rule it out. With other Fed members coming across as less concerned about last week’ s inflation numbers it will be interesting to see if Bullard reins back some of his hawkishness when he speaks later today on CNBC.
Nonetheless the inflation story remains the topic du jour for markets this week, with the latest UK inflation report for January due on Wednesday likely to be a key determinant in whether we see a third-rate hike in succession from the Bank of England next month.
Before we get to that, markets appear slightly more concerned about events on the Russia-Ukraine border, which saw oil prices rise sharply late on Friday to new seven-year highs, and which have continued to rise in Asia markets this morning. The rising tensions also saw bond yields slip back, while US stock markets closed sharply lower on Friday, and has translated into sharp falls in Asia markets.
Friday’s move lower in US markets appeared to coincide with comments from US national security advisor Jake Sullivan, who urged any remaining Americans in Ukraine to leave immediately, and that a Russian invasion could come any day. The US also ordered the departure of all US soldiers in Ukraine to leave the country immediately in case they get caught up if hostilities break out.
This escalation in tension coming as it did at the end of another turbulent week, saw investors adopt a safety-first approach ahead of the weekend, and looks set to translate into a lower open for markets in Europe this morning, given the weakness being seen in Asia markets.
EUR/USD – last week’s failure to move through the 1.1485 area has seen the euro slide back towards the 50-day MA at 1.1320, with stronger support at the 1.1270 area. The bias remains for a move back towards the lows this year at 1.1120.
GBP/USD – struggling to gain a foothold above the 1.3600 area keeps the bias for a move back towards 1.3430 where we have trend line support from the December lows. A sustained move above the 1.3600 area targets 1.3720.
EUR/GBP – slipped below support at the 0.8410/20 area and looks set to a retest of the 0.8280 lows earlier this month. We now have resistance back at the 0.8420 area.
USD/JPY – a sharp reversal on Friday from the 116.34 area has seen the US dollar slide back with support at the 114.70 needing to hold to keep the upside momentum intact, or risk a return to the 113.50 area. A break above 116.35 targets the 117.50 area.