With trading activity rather muted in Europe yesterday due to public holidays in Germany, France and Switzerland, it was left to US markets to shrug off the rather inexplicable late sell-off at the end of last week, and bounce back strongly yesterday.

The rebound was driven by a strong performance from Apple after it was revealed that Warren Buffett had built up a small stake in the company, while the return of oil prices to within a whisker of the $50 a barrel level helped drive a rebound in basic resource stocks. 

Concerns about supply disruptions in Nigeria, Venezuela and Canada along with a recent report from the IEA that the supply surplus may not be as large as originally estimated has helped drive a continued rebound in the oil price in the last few days.

Against this backdrop markets were able to shrug off further disappointing Chinese economic data as well as a simply awful US Empire manufacturing report from May which showed that economic activity contracted again after a brief recovery in April.

The strong finish for US markets is likely to see a similarly positive European open today with the main focus today set to be on the inflation outlook for the UK and US economy.

It was only a few months ago at the end of last year that UK CPI was in negative territory at -0.1%.

Since February, headline inflation has exhibited slightly more resilience than would appear to have been priced in, in fact since November last year CPI inflation has risen consistently on an annualised basis from -0.1% to 0.5% in March, and could well hit 0.6% when the April CPI numbers are released this morning. 

Core prices have also nearly doubled in the last 12 months, to 1.5%, while RPI has doubled since October last year to 1.6%, and with energy prices showing no signs of finding a top there is a risk that for all the heat and very little light being generated by the current debate surrounding the EU referendum, the Bank of England loses sight of its primary mandate, particularly since the labour market continues to look fairly resilient.

Over the other side of the pond the outlook for inflation is also starting to show some signs of stirring prompting some hawkish noises from a number of Fed officials, as US policymakers strive to keep the option of a June rate rise on the table.

Yesterday we heard from the Richmond Fed’s Jeffrey Lacker who stated that there remained a strong case for a June rate rise, however he is not on the voting committee this year, unlike the Boston Fed’s Eric Rosengren who is, and who has a history of leaning to the dovish side. His comments last week about the markets potentially mispricing the timing of a Fed move on rates appear to suggest he is leaning towards a rate rise in the next few months.

Today’s US CPI numbers for April could well add further fuel to that fire if they continue to show signs of rising. The headline rate is expected to rise to 1.1% in April from 0.9% with core prices excluding food and energy declining slightly to 2.1% from 2.2% in March.

Industrial and manufacturing production in April is expected to show an improvement on March, rising 0.3% after a sharp decline in February, however there is a concern given yesterday’s sharp drop in the May Empire manufacturing survey that an April rebound could simply be a “dead cat bounce”.

We should get a better idea later this week with the latest Philadelphia Fed survey, due on Thursday.

EURUSD – the euro slid lower dropping below the 1.1350 area and throwing into doubt the prospect for further gains. This could well see a drop down towards the April lows at 1.1220 in the short term. A fall below here could well see a move towards 1.1030. We need to see a move back through 1.1430 to stabilise.

GBPUSD – having briefly fallen below the 1.4350 level we could see the pound fall back towards 1.4300 and even 1.4180, but we still remain in the short term uptrend since the lows this year. We need to see a move back through 1.4450 to stabilise.

EURGBP – still looks soft while below the 200 week MA and as such the bias remains to the downside while below 0.7950. A concerted move below 0.7860 could well target neckline support at 0.7760 from the March lows which, if broken could trigger a sharp down move. A move and close above 0.7940 retargets the 0.8000 area.

USDJPY – the US dollar is currently finding resistance at the 109.40/50 area. While we could well extend up to 110.20 the bias remains for a move back towards 107.80 and back to the recent lows at 106.80, with the 200 week MA at 105.30 the major support level.

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