After Wednesday’s face-ripping rally, European stocks gave back some of those gains yesterday after it became apparent that Russia had little interest in engaging in meaningful peace talks when their foreign minister Lavrov met his Ukrainian counterpart Dmytro Kuleba in Turkey. Reports that Russian troops were closing in on Kyiv didn’t help either, as they attempted to encircle the capital city.
Yesterday’s US CPI number for February saw headline inflation rise to a new 40-year high of 7.9%, more or less rubber stamping a rate hike from the Federal Reserve for next week.
At around the same time the European Central Bank adopted a more hawkish policy stance than was expected when it announced that it would be tapering its asset purchase programme steadily over the summer, with a view to ending it in Q3. This move appears to open the central bank’s options with respect to potentially raising rates by the end of this year, although it doesn’t lock them into doing so.
After yesterday’s modest pullback, and another choppy session for US markets, which also saw them finish lower, today’s European open looks set to be a modestly flat one, helped in some respect by another decline in the oil price. Asia markets look set to finish the week very much on the back foot with a big decline in China tech shares weighing on the Hang Seng, while the Nikkei also set to finish lower, tracking yesterday’s declines in Europe and the US.
On the data front we have some fairly important economic numbers from the UK, from GDP to the latest manufacturing and industrial production numbers for February. When UK December monthly GDP numbers were released a few weeks ago, we saw that the UK economy slowed by -0.2%, mainly because of the implementation of plan B restrictions just before Christmas. For Q4, the economy expanded by 1%, a better-than-expected number given the challenges facing the consumer as well as the wider economy.
Even without the various plan B restrictions in place, there was always the prospect that economic activity would have slowed before Christmas as people became more cautious in order to ensure they didn’t catch Covid and have to spend the festive period isolating. As a result, we could see a January rebound in economic activity, a trend that does appear to be reflected in some of the recent economic data. Expectations are for a monthly expansion of 0.2%, driven by growth across all sectors of the economy.
The UK manufacturing and construction sectors saw a strong rebound at the end of last year, despite higher costs, and labour shortages. Order books have continued to look healthy, as has recent PMI data, and while there is little correlation between the two there is also little sign that we’ve seen any indication that economic activity in these sectors is slowing. Expectations are for a rise of 0.2% on both measures.
EUR/USD – briefly rallied up to the 1.1100 area before slipping back. A move below the 1.0970 area has the potential to undermine the risk of a move towards 1.1200, and open up the potential for a move back to the 1.0800 area.
GBP/USD – still looking heavy, with the failure to push back above the 1.3200 area keeping the onus on the downside and a move towards 1.2800.
EUR/GBP – squeezed all the way back to the 0.8435 area, before slipping back. A fall below the 0.8370 area undermines the current rebound, and could see a move back to 0.8320.
USD/JPY – continues to edge higher as we look to close on the next resistance at the 116.30 area. We have support now at the 115.30 area, as well as the 114.40/50 region.
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