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Europe set for higher open as volatile week draws to a close

volatility chart

We’ve seen more wild swings in equity markets over the last 24 hours, largely driven by a concern over slowing growth, and sticky inflation, raising fears of looming stagflation and possible recession.

These worries manifested themselves in the guise of fluctuating bond yields, and weaker commodity prices, while Federal Reserve officials continued to show little signs of resiling from their current approach of aggressive tightening in the months ahead.

San Francisco Fed President Mary Daly became the latest Fed official to make the case for another 2 50bps rate increases at the next two central bank meetings, while also playing down the prospect of a 75bps move. Fed chair Jay Powell also made it plain that the Federal Reserve’s main priority now was to “get inflation back under control” and back to 2%, a process that could “include some pain”, and he was also careful not to rule out the 75bps option completely.

European markets finished a roller-coaster day firmly lower, although well off the lows of the day, as did US markets, with the Nasdaq 100 falling to an 18-month low, rebounding from the 11,700 level, which is a 50% retracement of the entire up move from the 2020 lows to the record highs from November last year.

The rebound off the lows in the US has followed through into a rebound in Asia markets and looks set to translate into a higher European open as this week’s volatility looks set to continue.

Weakness in cryptocurrencies also served to muddy the waters for investors as the sharp declines here prompt further instability because of forced selling as investors try to meet cryptocurrency margin calls, by selling more traditional assets like shares.

The US dollar has continued to act as a haven, making fresh 20-year highs as US PPI for April followed in the footsteps of April CPI in reinforcing the narrative of inflation that appears much stickier than was thought to be the case a few months ago.

The pound slipped close to a two year low against the US dollar after the latest set of UK economic data pointed to a UK economy that has more or less ground to a halt. On the monthly GDP numbers January is the only month this year that has seen any economic expansion at all, and as far as the monthly numbers are concerned, could well be the high-water mark for this year.  

Crude oil prices, which spent most of yesterday lower, before rallying into the close, has spent the week being pressured by worries over slow growth and stagflation on the one hand, while on the other hand is being underpinned over attempts by Russia to use oil and gas as weapons. The rebound came about when Gazprom announced it would cut gas shipments to Europe through the Yamal pipeline, after the Kremlin imposed sanctions on European gas companies.

EUR/USD – has broken below the 1.0470 area and now we look set for a move towards the 2017 lows at 1.0340, and then on towards parity. To stabilise we need to get back above the 1.0650 level to signal a move back towards 1.0820.   

GBP/USD – having slipped below the 1.2250 area the next target now becomes the 1.2000 area. Major support lies around the 1.1980 area. We need to see a recovery back above 1.2470 to open up the 1.2600 area.

EUR/GBP – briefly broke above the 0.8600 area, and December highs tripping stops before falling back sharply and finding support just above the support at the 0.8470/80 area. This sharp fake out suggests that the downside remains the weaker side, with a break below 0.8470 targeting a move towards 0.8420.  

USD/JPY – the failure at the 131.35 area looks set to see a retest of the lows last week at 128.60. A break of 131.35 is needed to target 135.00. A move below 128.60 signals a move towards 126.80.

 

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