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European markets set for higher open as markets look to price a Fed hold

European markets got off to a poor start yesterday, as the tremors of the weekend events in Israel reverberated through financial markets, and oil and natural gas prices rose sharply, however the losses were modest, as yields fell back.

US markets initially opened the week lower, however sentiment turned around after comments from Fed vice chairman Philip Jefferson that the central bank might need to be careful about further rate rises given the recent increase in yields.

We also heard from Dallas Fed President Lori Logan earlier in the day who made a similar argument that the recent increase in rates, as well as Friday’s strong payrolls report may mean that further tightening may not be required, and which helped US stocks finish the day higher.

With US bond markets closed yesterday due to the Columbus Day holiday we’ve had to wait until today for US yields to play catch up with the rise in yields on Friday getting quickly reversed, with yesterday’s comments from Fed policymakers playing into the lower yield narrative.  

This change of tone could mean that instead of another rate rise between now and year end, the US central bank may well be done when it comes to rate rises.

Later today we’ll get to hear from Fed governor Christopher Waller, as well as Minneapolis Fed President Neel Kashkari, with Kashkari’s views likely to be the most relevant given his recent hawkishness when it comes to rate policy. If either of them seems inclined to lean in the same direction, then we could see yields slip further.

The US dollar also gave up its intraday gains to finish the day unchanged as the focus shifted back to US rate policy and away from geopolitical concerns.

Gold prices also finished the day sharply higher pushing up to one-week highs on the same geopolitical concerns that saw oil prices finish the day sharply higher.

This is the challenge facing markets now, focussing on economic data and the resilience of the US economy, or fretting about an escalation that may or may not happen.

As a result of last night’s recovery in US markets and the decline in yields European markets look set to open higher. 

EUR/USD – currently have resistance at the 1.0620 level, with a break targeting the 1.0740 area. The main support remains at last week’s lows at 1.0450, as well as the 1.0400 area which is 50% retracement of the 0.9535/1.1275 up move.  

GBP/USD – has managed to hold above last week’s lows at the 1.2030/40 area but needs to overcome the 1.2300 area to signal a move back to the 1.2430 area and 200-day SMA. A move below 1.2000 targets the 1.1835 area which equates to a 50% retracement of the move from the record lows at 1.0330 to the recent peaks at 1.3145.    

EUR/GBP – still range trading with resistance at the 0.8700 area and resistance at the 200-day SMA at 0.8720, which is capping the upside. Support comes in at the 0.8620 area as well as the 50 and 200=day SMA.

USD/JPY – holding above the spike lows of last week but is currently struggling to move back to the highs of last week at 150.16. Below 147.30 signals the top is in and a possible move towards 145.00.


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