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UK inflation in focus as trade concerns spread to China

With investors already cautious over the prospect of recent tensions over trade spilling out further into the global economy as Friday’s tariff deadline looms, and a US president who appears to have developed a hair trigger with respect to staff departures and arrivals, it probably wouldn’t have needed too much to prompt further profit-taking and further declines unfolding across equity markets.

That additional catalyst came yesterday as a result of a draft proposal by the European Commission to tax revenues on US tech giants in order to address the problem of the low levels of tax on profits these companies pay.

With a storm already raging around Facebook and its relationship with Cambridge Analytica, and valuations in the sector already sky high after last week’s new record high for the Nasdaq, some profit-taking shouldn’t come across as too surprising, as US markets closed sharply lower.

As expected US Treasury Secretary Steve Mnuchin was warned by the rest of the G20 about the risks current US policy could have on the existing world order for trade.

This didn’t appear to cut too much ice and with Friday’s tariff deadline looming the risk of counter responses is likely to increase, particularly since the US appears set on a course to impose $60bn worth of tariffs on up to 100 Chinese products by this Friday, according to some reports from senior administration officials.

Markets in Europe also fell back sharply with the FTSE 100 closing at its lowest level since December 2016, while the DAX and CAC 40 also struggled.

It could be argued that a rebound in the pound might have added to the FTSE 100’s woes, but offsetting that was the news that the UK and EU had arrived at a transition deal which will maintain the current status quo until December 2020, helping to bring some clarity and stability to business over the next 20 months.

This certainty is likely to be good news for the Bank of England when they meet later this week as it should make it much easier to deliver guidance on policy over the next few months.

Today’s latest inflation data could offer some welcome respite to the UK consumer, given recent concerns over the stickiness of current levels of inflation. Headline CPI has been stuck around 3% for several months now, frustrating central bank predictions of a possible peak in price pressures.

The recent recovery in the pound over the last 12 months doesn’t appear to be helping in this regard, though there is some hope that we could finally start to see some downward pressure start to manifest itself by now. Inflation in the EU and the US does appear to be slipping back a little, as shown by figures last week, and the expectation for today is that UK CPI for February will do likewise and slip back to 2.8%, with core CPI also softening from 2.7% to 2.5%.

This would be even more welcome if tomorrow’s wages data edges up from last month’s 2.5%, which it is expected to do.

Against this backdrop the latest Federal Reserve rate meeting gets under way today ahead of tomorrow’s largely anticipated rate decision where rates are expected to go up by 0.25%. New Fed chair Jerome Powell will probably have to navigate a tricky course of reinforcing future rate-rise expectations, showing confidence in the US economy while at the same time not appearing to be overly concerned at recent political events in Washington DC.

EUR/USD – is currently finding it difficult to push below the 1.2250 level, rallying back to the 1.2340 area. A break here retargets the 1.2400 level. A push below 1.2250 retargets the 1.2160 area.

GBP/USD – yesterday’s break above the 1.4000 area opened up a move back to the 1.4080 area, before retreating. To open up further gains towards 1.4250 we need to hold above the 1.3980 area. A move below 1.3970 runs the risk of a return to the lows last week.

EUR/GBP – moved down to the 0.8740 area yesterday before rebounding. Still range-bound for now with support at 0.8740, and resistance at 0.8840 and 0.8920.

USD/JPY – the failure to sustain a move beyond the 107.20 level last week saw US dollar slide back, a failure that runs the risk of a return to this month’ s lows at 105.25. We have resistance at 106.30.

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