Over one week on from Donald Trump’s inauguration as President of the United States and the reflation trade made a return last week with US stocks making new record highs, and bond markets selling off again.

Polarising as he is the executive orders signed by President Trump on the Keystone XL and Dakota Access oil pipelines as well as the Mexican wall have served to give certain sectors a significant nudge higher.

If price action is any guide it would appear that his new executive order regarding immigration signed over the weekend appears to have gone down less well with financial markets as early weakness in the US dollar and Asia stocks suggest that markets fear some significant economic blowback. As far as businesses are concerned the fallout has been negative the ban receiving criticism from all over the business community including the CEO’s of Google and Netflix, amongst others. 

As we come to the end of the month this week’s focus is set to shift back towards the inflation and the jobs outlook, and in particular the future relationship if the new US President and the US Federal Reserve.

It is no secret that President Trump is no fan of the US Federal Reserve given previous comments he has made about their low interest rate policies, and Janet Yellen, the Fed chief, during Barack Obama’s presidency.

This week’s meeting of the new FOMC rate committee is likely to give markets an early look at how the central bank sees the US economy in the wake of the most recent economic data, against a backdrop of rising economic uncertainty as to the long term effects of the new US President’s policies.

Today we’ll get the latest data for the Fed’s preferred measure of inflation, core PCE, which is expected to edge up in December to 1.7% from 1.6%. A strong increase here is likely to reinforce the case of the hawks on the FOMC. If personal income and personal spending also increase significantly, with expectations of rises of 0.4% predicted, that will be the icing on the cake for Fed officials who may be concerned the central bank is “behind the curve”

The reflation trade is also gaining traction in Europe as well with German central bank officials becoming much more vocal, about the ECB’s loose monetary policy. Last week Bundesbank chief Jens Weidmann wasn’t shy about suggesting that the ECB’s current stimulus program should end sooner, rather than later.

The latest preliminary German CPI numbers for January due to be released later today are only likely to add fuel to that debate and heighten criticism within Germany about the ECB’s negative rate policy. In December the annual CPI rate jumped to 1.7% from 1.4% and this month’s number is expected to hit the 2% level, which also happens to be the ECB’s target rate for the entire euro area.

In a sign that German bond markets are reflecting the risks of higher inflation German bund yields hit a one year high last week just below 0.5%.

EURUSD – still have strong resistance at the 1.0770/80 area with support back at trend line support now at 1.0670 from the lows this year. If we slip below here and Friday’s lows at 1.0650 we could drift back down towards the 1.0580 area, and prompt a deeper move towards 1.0450.

GBPUSD – having pulled back from 1.2675, the next level remains at the December highs, just below 1.2800. Interim support lies at 1.2520 while below that the bigger support comes in at the 1.2420 area, the 50 day MA, on any pullbacks. A move below 1.2400 argues for a return to the 1.2250 area.

EURGBP – the failure to take out the 0.8450 support area appears to have prompted a pull back, which could well extend towards the 0.8650 area. For the current down move to continue we need to push below the 0.8450 area to target a move towards 0.8300.

USDJPY – there’s a decent area of resistance near the 115.80 area, which needs to hold to prevent a move back to 118.65. A failure here could well see a move back towards 114.30 and the previous lows at 112.50.

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