Equity market jitters continued yesterday with another big fall for US markets for the second day in succession. In a market which has become a byword for continued record highs in the past few weeks these sorts of losses have been the exception for several months, which probably helps amplify some of the nerves investors are starting to feel right now.

The rise in bond yields seen over the past few days that has sown the seeds of current nervousness doesn’t appear to be showing any signs of slowing down, while yesterday’s announcement of a health care deal between Amazon, JP Morgan and Berkshire Hathaway, prompted a rush for the exits in health care provider companies. Given Amazon’s track record as a serial disrupter in any sector it interacts with, investor’s dumped stocks en-masse over concerns about a price war and lower margins across the sector.

Last night’s State of the Union address by President Trump didn’t provide too much in the way of surprises with a pledge to put about $1.5trn into infrastructure appearing as expected, though how it will be funded is likely to be an area for partisan debate between Democrats and Republicans.

Today’s Fed meeting isn’t likely to contain too much in the way of surprises, though it will be significant in that it will Janet Yellen’s last as Fed chair. She will pass the reins to Jerome Powell with markets pricing an over 90% probability that we will see another 25 basis point hike at the March meeting. Given that today is likely to be fairly straightforward in the context of the actual announcement with no change expected investors will be looking very closely at the statement and the FOMC’s expectations about the glide path for inflation given the recent tax reform measures, along with the recent announcements of US dollar repatriation, inward investment, bonus payments and pay rises.

Any indication that the Fed might be thinking in terms of more than two to three rate rises this year could push yields even higher, and that may well prompt the Fed to adopt a cautious tone and not deviate too much from what they said in December.

European markets have found themselves caught up in the nervous sentiment of the last couple of days, with senior ECB officials suggesting that there is now little further justification for the current bond buying program much beyond September this year. Unlike the US, Europe doesn’t have the same concerns regarding inflationary pressure, if anything prices appear to be softening if yesterday’s German CPI for January is any guide, dropping sharply to 1.4% from 1.7%.

If today’s EU flash CPI for January exhibits similar tendencies and also falls back there will be some on the ECB who might want to push back on this expectation. Headline CPI is expected to fall modestly to 1.3% from 1.4% with core prices increasing to 1% from 0.9%.

We’ll also be getting the latest unemployment data from Germany, Italy and the EU which are expected to show further improvements and come in at 5.4%, 10.9% and 8.7% respectively.

The pound had a decent day yesterday despite sinking sharply early on over concerns about the future of Prime Minister Theresa May amidst widespread dissatisfaction within her party over her ambiguous Brexit strategy.

These concerns appear to have subsided for now as the Prime Minister expressed her determination to carry on as she headed off for a three day trip to China with up to 50 business leaders in order to boost trade ties amidst the chaos of current events surrounding Brexit. She will also be hoping that the devil won’t make work for idle hands in her absence, particularly given all of the grumblings going on about her leadership.

On the data front consumer confidence improved in January rising from -13 to -9, while the Lloyds Business barometer also increased from 28 to 35, a nine month high, an encouraging sign against a backdrop of negative headlines.

EURUSD – we still have support at the 1.2320 area after yesterday’s rebound back to 1.2450. The uptrend continues to remain intact while above this key support, but we need to take out last week’s high at 1.2550 to bring 1.2600 the 61.8% retracement level of the 1.3995/1.0340 down move into view.

GBPUSD – found support at 1.3980 yesterday before rebounding strongly back to the 1.4170 level. We need to move back above 1.4180 to retarget a move back to the recent highs at 1.4340. Below 1.3970 targets the 1.3850 area.

EURGBP – underwent a false break of the 0.8820 area yesterday reversing back from 0.8835 and keeping the prospect of a move back to the lows at 0.8690 on the table. A move down through 0.8750 would reinforce expectations of this.

USDJPY – currently treading water below the 110.10/20 area and while below here the risk is of a return to the 107.30 area and September lows. We need to see a move back through 110.20 to argue for a retest of the 111.00 area. 

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