European markets underwent a torrid session yesterday, falling sharply as concerns rose of an escalation in trade tensions between the US and China, after President Trump raised the prospect of higher tariffs on $200bn of Chinese products, from 10% to 25%.

The reasons for looking at increasing the tariff percentage may well be down to the recent decline in the yuan, which has likely cushioned some of the effects. Nonetheless it didn’t go down well with Chinese officials who responded by saying that they were ready to retaliate.

US markets initially looked to follow suit before rebounding sharply as a rising Apple share price helped lift all boats as it became the first US-based $1trn company, helping lift the S&P 500 and Nasdaq to close higher on the day.

This Apple-inspired rebound is likely to offer a respite for markets in Europe this morning ahead of today’s US payrolls report.

The Bank of England finally ended a nine year wait by moving interest rates above 0.5% for the first time since 2009, pushing them up by 25bps to 0.75% in a unanimous vote. The pound which had been slipping in the lead up to the decision struggled to push higher in the aftermath as markets struggled to understand the banks reasoning behind yesterday’s move.

Having got this particular monkey off their back markets automatically shifted their attention to the timing of when to expect the next one, and it is here that the picture is a lot less clear cut, as we head closer to a Brexit denouement, with the prospect of another rate rise in the near future still a distant prospect, and it is this that probably sent the pound lower.

As far as the data is concerned this continues to hold up with UK construction PMI for July rising at its fastest rate in over a year, coming in at 55.8, with housebuilding and commercial work both adding to rising momentum.

Today’s services PMI for July could well go further in showcasing that the rebound seen in the Q2 numbers isn’t a temporary phenomenon and has momentum. This is expected to show a modest slowdown from June’s 55.1 to 54.7, as the boost from the warm weather and England’s World Cup run came to an end.

While we appear to have seen a rebound in the UK economy in Q2, the same can’t be said with any certainty with respect to the EU and France in particular which saw its own GDP come in at 0.2% in Q2. You would think that having won the World Cup that the services sector would show evidence of some sort of pickup in July, but even here expectations are modest in that we could see a slowdown to 55.3. This could be even weaker if the effects of air traffic control and rail strikes caused a bigger loss of output than has originally been estimated.

Italian, Spanish and German services activity is also expected to slow, coming in at 53.7, 54.4 and 54.4 respectively, raising further concerns that the European recovery story is slowing further.

The strength of the US dollar is also likely to cause further angst at the White House as the US economy continues to set the pace, as we look ahead to the prospect of another two rate rises by year end, along with some haven flows over rising concerns about an escalation in the US, China trade story, after China threatened to retaliate over additional US tariffs.

Today’s US employment report is likely to reinforce the hawkish narrative of the US central bank with the latest non-farm payrolls set to show that 193k new jobs were added in July. Once again it will be the wages data that will help to determine the direction of the US dollar, which is trading back at one-year highs against a basket of currencies.

This is something that President Trump has railed against recently, accusing both China and the EU of artificially keeping their currencies weak, and is likely to raise his ire again.

A good payrolls report will merely reinforce that dynamic with the unemployment rate expected to fall back to 3.9% from 4%, and wages expected to remain steady at 2.7%, still below the peaks we saw in January at 2.9%.

EURUSD – it seems quite possible that we could be set for a retest of the 1.1500 lows that we saw in June. The close below 1.1620 puts further pressure on the downside. We would need to see a move through 1.1750 to stabilise.

GBPUSD – slid below support at the 1.3070 area raising the prospect of a test of the July lows at 1.2950 and potentially 1.2880. We need to see a move back above 1.3175 to stabilise.

EURGBP – ran out of steam at the 0.8925 area after finding support at the 0.8855 area. The big resistance remains up at the 0.8970 area, and seems to be range trading for the time being.

USDJPY – struggling to move above the 112.20 area for the moment but still has the potential to move up to the previous peaks at the 113.20 area. Support now comes in at the 111.70 area as well as the 50-day MA at 110.50.

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