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Sterling slide helps push FTSE 100 to a three-month high

On the basis of yesterday’s economic data, there was little to cheer in the way of economic activity at the beginning of 2019. The Italian economy continues to look weak and on course for the third successive quarter of contraction, while the latest French PMIs appear to show that the economy in France isn’t too far behind when it comes to an economic slowdown.

The UK economy wasn’t spared either, as service sector activity posted its weakest reading since July 2016, the month after the Brexit referendum, as new orders slid sharply. Firms reported increased anxiety about how events could well play out in the coming weeks, as we head towards the UK’s departure date from the EU next month. New car sales also slumped in January, continuing a Europe-wide theme of weakness that has been going on for five months now. The pound slipped to a two-week low against the US dollar as a result, as markets priced out any possibility of a rise in interest rates this year, Brexit deal or not.

There appears to be little doubt that while the UK economy is slowing, it is not alone in its sclerosis, with Italy and France out in front with even weaker data, while the German economy is also struggling. Against this sort of economic backdrop, it ill behoves politicians on both sides of the Channel to play Russian roulette with the Brexit negotiations. The EU has consistently stated that it feels that the UK has more to lose from a disorderly Brexit, with both sides ramping up preparations for a no-deal scenario.

The risk with this sort of calculation is that, at a time when the financial system in Europe is anything but robust, the fallout of a no-deal Brexit could bring the roof crashing down on Europe’s head, with serious consequences for the global economy.

Despite the deterioration in the latest economic data releases, investors piled back into equity markets, sending the FTSE 100 to three-month highs, and European stocks to their highest levels in two months. The rise in the FTSE was helped by a weaker pound as well as a well-received set of numbers from oil giant BP.

US markets also continued their upward march, despite a disappointing update from Alphabet, buoyed by continued optimism about company earnings, with the S&P 500 pushing back to within touching distance of its 200-day MA for the first time since we broke below it two months ago.

Investors were also looking to last night’s State of the Union address by President Trump for any clues as to how the US, China trade talks are progressing, along with any indications as to whether he is any mood to step back from another government shutdown. On both there was little additional detail, though he did point out there was only a few days to secure a deal to keep the government open, as he attempted to try and bridge the partisan divide with measures to help fund paid family leave in the 2020 budget.

After yesterday’s bumper move higher, markets here in Europe look set to open slightly lower as investors take stock of the latest factory orders data from Germany, which is expected to recover slightly to 0.3 after the 1% plunge in November, although on an annualised basis they are still expected to make grim reading with an expected decline of 6.7%.

EUR/USD – continues to slip back with the risk of a move below the 1.1400 level and towards the November lows at 1.1215. We need to see a move beyond the 1.1520 area to signal a deeper move towards the December peaks at 1.1570.

GBP/USD – cable's slide below the 1.3020 area has seen the pound continue to fall, with the prospect that we look on course for a move towards 1.2820, on a break below the 1.2920 area. Only a move back through the 1.3020 area stabilises and opens up a return to the highs of January at 1.3200.

EUR/GBP – has broken through the 0.8800 area, opening up the prospect of a retest of the 200-day MA at 0.8860, however we need to see 0.8820 crack open first. Still in the range with support back near the 0.8770  level.

USD/JPY – the 110.20 level remains a key resistance. We need a break through here to retarget a move towards 111.00. A failure to move above the 110.20 level keeps the onus on fall back towards the 108.20 area. Above 110.20 argues for a move towards 111.00.

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