It was a disappointing day for European stock markets yesterday with the exception of the FTSE 100, which put in its 13th successive positive close as well as another record high.

Once again though, it was the weakness of the pound that helped pull the UK blue-chip index above water, along with yet another strong performance from the basic resource sector.

The gains here were aided by a weaker US dollar which helped underpin commodity prices across the board with silver and copper prices all pushing to multi week highs, while rising caution helped push gold prices above $1,200 to its highest levels since mid-November. It would appear that while stocks still remain the asset class of choice, some in the market are taking advantage of the fact that gold has been languishing near one year lows.

In the US, equity markets also slipped back, as did the US dollar, with financial stocks leading the way, as the market geared itself up for a raft of earnings announcements from US banks including JP Morgan, Bank of America and Wells Fargo, which while they could well beat on the top line may disappoint on the guidance.

Given the current weakness in US yields, which hit their lowest levels since the Fed hiked last month, investors started taking profits as investors started to price in the potential that the goldilocks reflation scenario may well come up short, after this week’s rather surreal press conference by Donald Trump earlier this week, prompted some investor reassessment of what to expect from the president-elect in the coming weeks.

On the data front the picture still remains quite positive, with a succession of Fed speakers including new voting member Philadelphia Fed President Patrick Harker arguing that three rate rises this year remained a realistic prospect.

Today’s US retail sales numbers for December could well reinforce that positive mindset with an expectation of a rise of 0.5%, up from 0.2% in November, though given recent disappointing updates from some US retailers there is a risk this could fall short.

While the US dollar sank like a stone, the pound wasn’t able to capitalise also coming under pressure late on reports that UK Prime Minister Theresa May would be giving a speech next Tuesday outlining further details on the UK’s negotiating aims.

Earlier this week the pound slipped to its lowest levels against the US dollar since the flash crash low in October after Theresa May said that control over immigration would be a red line, though why this should be news to markets is rather surprising. On this she has been quite consistent, which suggests that while markets may be hearing they are not listening.

Overnight markets got a look at the latest trade outlook for the Chinese economy, after some mixed November numbers, and to a large extent they were a little disappointing, particularly on the exports side, and raised concerns a slowdown in global demand. Imports rose 6.7% in November reflecting some improvement in internal demand, but exports were a little disappointing, rising 0.1%.

Given the recent surge in commodity prices which appeared to peak in December, driven largely by Chinese demand it would be surprising if imports for December were to disappoint, and while they came in below Novembers 6.7% they still beat expectations coming in at 3.1%.

Exports on the other hand dropped sharply by 6.1%, down from the 0.1% gain seen in November, and this slide should raise concerns that demand may well be sliding again in the global economy, particularly in Europe.

EUR/USD – yesterday’s rebound to 1.0685 saw us fall just short of the 1.0700 area. Trend line support from the lows this year comes in at 1.0520. We need to see a move back above the 1.0700 area to mitigate the risk of a move back towards 1.0340 as well as parity.

GBP/USD – yesterday’s rebound from this week’s multi month low at 1.2038 ram out of steam at 1.2320 yesterday before sliding back. While we remain above the all-important 1.2080/1.2100 support area, we should continue to range trade between 1.2100 and 1.2500. A move below 1.2000 though could well see a move towards 1.1800.

EUR/GBP – having dropped back below the 0.8700 area the risk remains for a move back towards the 0.8580 area, despite this week’s high at 0.8764. We need a move back through the 0.8720 to mitigate further downside risk.

USD/JPY – continues to look soft rebounding from 113.75 yesterday and while below 115.60 the prospect of a move towards 111.00 remains a real possibility. We need to recover back through the 116.20 level to argue for a return to the 117.00 area. A close below 114.80 is needed to target a move towards 111.00. Big resistance remains back at the potential double top formation highs at 118.65.

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