US markets closed mixed yesterday, with the Nasdaq hitting another new record high, but there was no retest of the 20k level for the Dow after Friday’s failure, as it and the S&P500 retreated on weakness in banks and oil and gas stocks.

A weaker pound provided the main catalyst for another record close on the FTSE100 yesterday, and a record 10th consecutive positive close, as all other European markets slipped back on the back of weakness in banking and oil and gas stocks. 

The pound slid sharply yesterday after weekend comments from UK Prime Minister Theresa May that suggested that staying inside the single market was not her top priority, with immigration controls likely to be one of the red lines.

This has been a fairly clear priority for some time and with German Chancellor Angela Merkel reinforcing the EU line of no cherry picking, markets once again appear to be pricing in the prospect of a so called hard Brexit, and the extra costs that the leaving of the single market might entail, which has once again seen the pound come under pressure. 

While markets fret about this prospect the fact remains that not being a member of the single market doesn’t preclude access to it, it’s just a question of degree and given that UK products already meet regulatory equivalence any new deal wouldn’t necessarily have to be completed straight away in any case.

For now though it seems that the market can only distinguish between two distinct outcomes and for now their preferred outcome appears to be the one that the UK government doesn’t look like it will be pursuing, and with the March deadline for Article 50 fast approaching the uncertainty isn’t likely to diminish, and this may well pressure the pound further in weeks ahead.

Despite all the doom and gloom the UK economy has managed to hold up well on course to be the best performing economy in the G7, with the latest BRC retail sales numbers for December coming in at 1%, up from November’s 0.6% rise, reinforcing the resilience of the UK consumer at the end of last year.

The oil price was a big loser yesterday, hitting its lowest levels in over two weeks on concerns that for all the talk of an OPEC deal, the reality of seeing it implemented may be more problematic after record output data from Iraq, an increase in exports from Iran and a one year high in US rig counts weighed on prices.

Overnight the latest Chinese inflation data showed an increase in pricing pressures with factory gate prices rising again in December for the fourth month in a row, coming in at 5.5%, higher than expected and marking an increase in prices of 6.3% since August when they came in at -0.8%. The recent sharp rises in iron ore, copper and crude oil prices has no doubt gone some way to fuel this continued rise in inflationary pressure, along with the recent weakness in the Chinese currency.

Consumer prices showed a rise of 2.1%, slightly down from November’s 2.3%

EURUSD – has managed to hold above the 1.0500 level for now but a break could sell signal a move back to the recent 1.0340 lows. While above the 1.0500 area we could see a move back towards 1.0700, but while below 1.0700 the prospect of a move towards parity still remains.

GBPUSD – despite the weakness of the past couple of days we’ve managed to hold above the larger support area between the 1.2080 and 1.2100 area. A move below 1.2080 could well open up the previous lows below 1.2000, but for now we look set to continue to range trade between 1.2100 and 1.2500.

EURGBP – the move through the 0.8580 level suggests a return to the 0.8700 area. Any pullbacks should now find support back near the 0.8580 area.

USDJPY – the US dollar gave up some of Friday’s gains yesterday sliding back towards the 116.00 area after running out of puff above the 117.00 area. Big resistance remains back at the potential double top formation highs at 118.65. While we may have to lower the break out support level to 114.80 on the downside, Friday’s low of 115.06 could also offer support.

CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.