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Weak US finish expected to see Europe open lower

Despite a late rebound in the last couple of weeks equity markets still finished the month in pretty much the same way they started it, on the back foot, as the selloff that started in the wake of new Fed chair Jerome Powell’s testimony on Capitol Hill continued yesterday as investors began to reassess the prospect that we could well see four rate increases from the Federal Reserve by the end of this year.

Mr Powell returns for a second round today with US lawmakers and markets will be looking to see whether he rows back a little from Tuesday’s hawkish interpretation of his remarks or whether he reaffirms them. If he does the latter then we could well see further gains for the US dollar and increased pressure on stock markets.

For the Dow and S&P500 we’ve seen the first monthly loss since last March last year, breaking a ten month winning streak, while European markets also lost ground with the DAX making its weakest monthly close since August, and the FTSE100 posting its weekly monthly close since April.

The US dollar finally appears to be catching a bid on the back of this as it finished a month in positive territory for the first time since October against a basket of currencies.

The overarching concern for investors appears to be a US central bank that seems determined to push ahead with its policy of raising rates at a time when perhaps their confidence about the economy may well be a little premature.

Recent data hasn’t been particularly supportive of a strengthening economy, and if the trend seen in the last few weeks is any guide Q1 GDP is likely to come in fairly weak. Against that backdrop it seems reasonable to ask the question as to whether the US economy can absorb up to a 1% increase in the Fed funds rate by year end.

Today’s US data could hammer another nail into the negative psyche of traders and investors, especially if personal spending and income data along with ISM manufacturing also miss expectations.

Economic data away from the US has also been showing signs of plateauing a little, with data out of Japan and China earlier this week also on the weak side, which brings us into March and the latest survey data drop from the manufacturing sector and the latest PMI’s for February.

Today’s data out of Europe is still expected to be fairly strong but it appears to be coming down from its recent peaks and with inflation stubbornly subdued in the latest February data out of Germany, France and Italy, it appears that despite what appears to be strong data, demand doesn’t appear to be fuelling inflationary pressures.

Spanish, Italian, French and German manufacturing PMI’s for February are expected to all soften slightly to 54.8, 57.9, 56.1 and 60.3 respectively.

In the UK the pound took a late hit yesterday dropping to its lowest level since mid-January after Prime Minister Theresa May rejected outright the EU’s latest draft text on the Irish border issue which stated that in the absence of any agreement to the contrary that Northern Ireland stays in a customs union after Brexit and is subject to all EU rules and regulations.

The text also omitted any reference to an extended transition period, which the UK has asked for as the EU turns the screw on the UK government to lay out exactly what sort of plans they have in mind with respect to the future trade relationship. The problem for PM May is trying to obtain a consensus view in cabinet with some concerns that the inability to make a decision will result in a political crisis that could undermine the government’s stability.

On the data front we have the latest manufacturing PMI for February which is expected to slip back slightly from January’s 55.3 to 55.1.

EURUSD – sliding towards the 1.2160 area, a break below this level could well precipitate further losses towards 1.2080 initially and a retest of the 1.2000 area.  We need to see a recovery back above 1.2320 to stabilise and a return to the recent highs near 1.2500.

GBPUSD – had a weak session yesterday, sliding back below the 50 day moving average and towards the 1.3750 support area. A break here opens up further losses towards the 1.3650 area We need to see a move back above 1.3980 to stabilise.

EURGBP – moving back towards the top end of the recent range but still below the 0.8910 area for now. While below the 0.8910 area which has held for all of this year the bias remains for a return to the lower end of the recent range at 0.8740.

USDJPY – while below the 108.30 area the bias remains for a move back to the recent lows at 105.50, and the 105.00 area.

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