It was another choppy and cautious, albeit positive day for equity markets yesterday against a backdrop of trade concerns, as well as the uncertainty about the outlook for Italian politics. This is a theme which is likely to be repeated on a daily basis through the rest of this week until the picture becomes clearer, particularly on the trade front given the overnight news of the departure of President Trump’s chief economic adviser Gary Cohn.

As someone, who it is reported was enormously uncomfortable with the president’s trade policy, particularly with respect to tariffs, there are now concerns that any moderating influence on the president has disappeared, meaning that the US administration’s reaction function has now become much more unpredictable. This appears to have been reflected overnight in Asia, where markets have dropped sharply and is likely to be repeated in Europe this morning with a lower open.

Despite the inconclusive outcome of the Italian election the FTSEMib still managed to put in a positive day, outperforming the wider market to close well above where it finished at the end of last week, rather begging the question: what Italian election?

The rest of Europe, while also closing higher for the second day in a row, showed few signs of getting too carried away despite a brightening of the geopolitical outlook after North and South Korea announced they were willing to start talks in April about the potential for a nuclear de-escalation. The market response to this, while positive, didn’t last very long simply because it’s been something that has been background noise for some time now, and which markets have largely discounted anyway.

The backdrop continues to be about the prospect of the implementation of new tariffs, more so now with Cohn’s departure, along with possible countermeasures, a concern that remains a significant drag on the US dollar, which had another disappointing day yesterday. For all of the optimism about an improving economy and the likelihood of higher rates from the Federal Reserve it is concerns about trade that are currently driving the greenback’s direction.

Today’s ADP employment report for February, the warm-up act for Friday's non-farm payrolls report, is expected to reinforce the narrative of a tight US labour market, with 200,000 new jobs expected to be added, down slightly from the 234,000 in January. The fact that these payroll reports are still coming in with numbers in the region of 200,000 shows that there is still some slack in the US labour market. Quarterly unit labour costs are expected to show upward pressure with a rise of 2.1%, a slight increase from the previous 2%.

We’ve also got the latest rate decision from the Bank of Canada where it is expected that rates will stay unchanged at 1.25%, after being raised again in January. Last week’s disappointing monthly GDP number of 0.1% will be one of many reasons for the central bank to hold fire until we see further evidence that the economy can withstand it. Consumer spending has also been weak while inflation has slowed. That along with the current uncertainty over tariffs and NAFTA is likely to prompt the bank to wait and see.

EUR/USD – broke above the 1.2370 yesterday and pushing up to the 1.2420 level, where we’ve seen a pause. A move through 1.2430 retargets the highs above the 1.2500 level. The 1.2360 level should now act as support with a move below retargeting the 1.2250 area.

GBP/USD – has continued to edge higher with the 1.3980 level the next key resistance and obstacle to a move towards 1.4200. If we drift back down the 1.3820 level is likely to be support while below that we have last week’s lows near 1.3710.

EUR/GBP – we’ve had three goes at the 0.8950 level in the last three days. This is becoming a key resistance area, which while it holds could prompt a return to the 0.8870 level, with a break retargeting the 0.8810 area.

USD/JPY – has managed to find a bit of base at the 105.20 area with a move back through the 106.30 area arguing for a move back to the 107.20 level. A move below 105.00 targets the 100.00 area. We need to move above the 108.30 area to stabilise.

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