It looks set to be another weak open for European markets this morning in the wake of another disappointing US and Asia session, as markets absorbed the latest attempt by US president Donald Trump to "put America first".

Yesterday we saw fairly solid economic data out of the US, along with a reaffirmation by Fed chair Jerome Powell of his hawkish comments earlier in the week about the prospects for the US economy, which saw the US dollar briefly hit six-week highs.

These gains turned out to be rather fleeting due to a sharp turnaround in the wake of the announcement by President Trump that he would be imposing significant tariffs on steel and aluminium imports next week, raising concerns about the prospect of a trade war.

US markets which had already been under pressure, accelerated their losses to close lower for the third day in succession, as the memories of the recent sharp rebound from the recent February lows recede into the distance.

25% tariffs on steel and a 10% tariff on aluminium imports has raised concerns of countermeasures from China and the EU in response and is likely to see European stocks, which had already been struggling ahead of this weekend’s Italian election and important SPD vote in Germany, follow stocks in Asia and open sharply lower over concerns that costs will rise and profit margins will get hit sharply.

The DAX appears to be leading the declines in European markets this week, with car makers already under pressure as a result of this week’s German court decision regarding bans on diesel cars, last night’s news on tariffs could well give them another kick lower.

While yesterday’s positive US ISM manufacturing report paints a robust picture of the US economy along with weekly jobless claims at their lowest level since 1969, the divergence between the internals of the ISM prices paid data which came in at its highest level since 2011, and headline inflation, continues to bemuse.

The pound had another disappointing day yesterday as political concerns weighed on the currency ahead of today’s speech by prime minister Theresa May, in which she is expected to respond to this week’s release by the EU of the draft legal text where the paragraphs on the issue of the Irish border which have stirred up a lot of heat about the status of Northern Ireland in any new agreement.

It is to be hoped that the UK government will finally take back the initiative, with respect to the next move, with proceedings currently being entirely driven by the EU. Expectations about this are set fairly low given the splits within the cabinet, but who knows we may get some detail on whether the UK has any other proposals to deal with this particular issue.

On the data front the latest manufacturing PMI for February came in at 55.2, an eight month low, and slightly below the January number. New orders remained positive, and activity still remains fairly decent, however today’s construction PMI is likely to be more disappointing given recent problems in the sector with respect to Carillion. This is expected to remain stagnant around the 50 level, while later on this morning Bank of England governor Mark Carney is making a speech on the evolution of money and cryptocurrencies.

Markets will be looking for any clues as to whether he concurs with recent comments by deputy governor Dave Ramsden, about the likely prospects for further rate rises.

EUR/USD – found support at the 1.2150 area before rebounding and this is a key support area. Only a move below this support targets a move towards 1.2000.  We need to see a recovery back above 1.2320 to stabilise and a return to the recent highs near 1.2500.

GBP/USD – continues to look weak with a low of 1.3710 yesterday with the risk we could move towards the 1.3650 area. We need to see a move back above 1.3980 to stabilise.

EUR/GBP – continues to edge higher with this year’s high at 0.8930 the next resistance. A break above the 0.8930 area retargets the 0.9000 area. While below the highs this year the bias remains for a return to the lower end of the recent range at 0.8740.

USD/JPY – while below the 108.30 area the bias remains for a move back to the recent lows at 105.50, and the 105.00 area.


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