European markets spent most of the end of last week consolidating the gains of the first part of the week, reversing most if not all of the post-Thanksgiving sell off in the wake of concerns over the Omicron variant. US markets on the other hand went one better, with the S&P500 posting a new record close, and its best week since February.
While market concerns about Omicron appear to be diminishing, the concerns of governments about the variant appear to be going in the other direction and increasing, with the UK government implementing a Plan B of new restrictions starting this week, as well as accelerating the roll out of its booster vaccination program.
Against these increasing concerns of a rising Omicron wave, in Europe there is the already present wave of Delta to deal with, which is still on current evidence much more deadly, while there are still no reported fatalities because of Omicron anywhere in the world, including South Africa, where it was first reported.
This appears to be prompting concern that politicians are over-reacting, not only here in the UK, but the US as well with some US states reimposing new restrictions in response to new cases.
For now, equity markets appear to be adopting a glass half full approach to recent events, even as US inflation came in at its highest levels in 39 years on Friday, amidst a backdrop of increasing concern that central banks are massively behind the curve.
Nonetheless as we look ahead to a new week, with the likes of the Federal Reserve, Bank of Japan, Bank of England and European Central Bank all due to deliberate on policy, European equity markets look set to start the week on the front foot.
Friday’s US November CPI number of 6.8% came as a little bit of a relief that it wasn’t higher, with US 2-year yields slipping back from its 0.724% Friday peak.
Nonetheless Friday’s number can’t disguise the fact that US CPI has jumped 1.4% in the last two months alone, and PPI, which tends be a leading indicator is even higher, and expected to come in at 9.2% when numbers are released tomorrow.
This gives US central bank policymakers a lot to ponder when they meet later this week, and determine how quickly to speed up their tapering program. With the voices getting ever louder that the Fed is well behind the curve, we could get a hawkish surprise this week, when the FOMC concludes its Wednesday meeting.
It’s not just the Federal Reserve that has an inflation problem, so does the Bank of England, with CPI set to move close to 5% this week and RPI close to 7%, the central bank has the same problem when it comes to calls to start acting on inflation becoming embedded.
Its own guidance in this regard has been woeful missing a golden opportunity in November to start the ball rolling on a rate rise, it would be a big surprise if they did anything other than nothing this week.
This has been reflected in the recent weakness of the pound which has slipped back in recent days, firstly over economic concerns, due to the new restrictions, but also due to the receding likelihood of a rate rise.
EUR/USD – has so far failed to move above the 1.1385 area, keeping the pressure on the downside. The key support remains at the November lows at 1.1185, as well as the 1.1160 level. A move through 1.1420 argues for a move back to the 1.1520 level.
GBP/USD – has so far managed to hold above the 1.3160 area, and while we do so we can move back towards the 1.3400 area. A break of 1.3160 opens up the 1.3000 level. We need to recover back above the 1.3300 level to stabilise and move towards the 1.3500 level.
EUR/GBP – despite a short squeeze to the 0.8600 area last week the euro still looks weak, falling back quickly below the 200-day MA again. Support remains at the 0.8480 level and needs to break below this level to diminish the risk of further gains.
USD/JPY – the 114.00 level continues to act as resistance. A breakthrough 114.00 has potential to target the 115.00 area. The 112.50 level still looks fairly solid for now. A move below the 112.50 level targets the 111.80 area.