Wind the clock back 12 months and concerns about the Chinese economy were prompting a significant period of volatility in both currency and stock markets. As we head into 2017 though, worries over China have taken a back seat, with Brexit and the impeding inauguration of Donald Trump as US president on Friday now front of mind, in what looks set to be another choppy week for financial markets.

The weakness of the pound has been one of the key catalysts as to why the FTSE 100 has managed to push strongly above its previous all-time highs, as well managing to break record after record in closing higher every day since just before Christmas.

This pattern looks set to continue again, with a higher open for the UK benchmark, as we head into a new week after the pound fell below the 1.2000 level for the first time since the flash crash lows in October last year in Asia overnight.

It would appear that the main catalyst behind this sell-off is speculation that UK prime minister Theresa May will set out tomorrow the UK government’s position when it comes to coming to deal with the EU with respect to its negotiation position ahead of the expected triggering of article 50 in March, though this could still be derailed by the Supreme Court ruling which is due any day now.

The expectation is that the prime minister’s insistence on being able to better control immigration as well as the UK’s law making, will result in the UK announcing its intention to leave the single market and customs union, which most investors appear to assign as being exceedingly negative for the pound.

The binary nature of the market reaction thus far in terms of being negative for the pound, appears to be slightly contrary to recent comments from Bank of England governor Mark Carney that Brexit isn’t the main threat to the UK economy at this point in time, but financial instability in Europe. Mr Carney may well expand on these comments in a speech later this evening.

This does appear to be a view that could well be shared by the EU’s chief negotiator Michel Barnier who it has been reported has expressed concern that a disruptive transition could be extremely negative for Europe and its exceedingly fragile financial system given the UK and the London’s role as the EU’s investment banker.

For now this risk appears to be being ignored, but it is likely to be a clear and present danger for the EU and the euro in the coming months, given that EU politicians have done precious little to shore up their banking system, and investors will ignore it at their peril.

Soon after her speech Theresa May will head off to the Swiss Alpine Resort in Davos, one of the only G7 leaders to do so, and the annual junket of the World Economic Forum, which starts tomorrow. While many have started to question the relevance of a forum that remains completely disconnected to the problems of ordinary people, her visit will still give her the opportunity to meet Chinese leader Xi Jinping who will be attending for the very first time.

Mr Trump won’t be attending given preparations for his inauguration later this week, as well as the fact he’ll probably setting out his latest policy by way of a tweet storm, but market participants are slowly having to get used to his rather unique way of doing things, which appears to have prompted some caution amongst US investors as the Dow continues to struggle near 20k. 

EUR/USD – having fallen short of the 1.0700 level last week the euro remains vulnerable to further losses back towards trend line support from the lows this year 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 – despite closing above the 1.2080 key support at the end of last week the pound has fallen below the 1.2000 level in early Asia trade Sunday night, pushing back to its flash crash lows of October last year. A close below 1.2000 could well be the catalyst for further losses in the short term.

EUR/GBP – the euro continues to push higher pushing through the 0.8800 level and towards the 0.8920 area, with the prospect of a move towards the November highs around 0.9000 a possibility. Only a fall below the 0.8760 area negates this.

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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