Less than 24 hours after posting its best day since March, the S&P500 slipped back sharply as US markets went straight back into reverse gear yesterday, despite a continued firmness in oil prices. For all the concern surrounding the oil and gas sector and the collapse in prices, oil prices are one of the best performing assets so far this year, up over 25% year to date, on both Brent and WTI, with US prices closing at their highest levels this year.

It was the retail sector that was the undoing for investors yesterday as the sector suffered its worst one day decline in five years.

A guidance warning from Macy’s appeared to start the rot, also sending sector peers like Wal-Mart lower, while Disney share price also slid sharply despite the company posting a 6% rise in revenues. The problem for Disney is not about their movies, they are still a money spinner, it is more about their traditional cable business as subscriber numbers decline. The reluctance of the company to invest in an on-line content business at a time when streaming businesses like Netflix, Amazon Prime and Hulu are growing rapidly could well be a decision management come to rue as viewing habits change amongst consumers.

Investors appear to be waking up to the fact that US consumer spending may not be as resilient as first thought, though why this should be a surprise to anyone given the weakness seen in retail sales growth and durable goods orders over the past year or so is somewhat puzzling.

A slowdown in US consumer spending is doubly concerning given how much the US economy relies on consumers hitting the shops and spending their hard earned dollars.

Given last night’s losses in the US, markets in Europe look set to open lower this morning with the main focus of attention set to be back on sterling as the Bank of England meets for its monthly rate meeting and the latest quarterly inflation report.

As far as rates are concerned there shouldn’t be any surprises with unanimous votes expected to keep policy unchanged for the 86th month in a row.

What will be pored over is the banks outlook for growth and inflation and it is here we could well see some changes with downgrades to the growth forecasts while the inflation forecast is likely to be nudged upwards.

At the last inflation report Bank of England officials were projecting that pricing risks were tilted towards the downside in the near term, however this looks likely to change given the direction of travel of prices since November last year.

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 next week.

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%.

On the growth front we can expect to see another hefty downgrade, following on from the downgrade from 2.5% in February. The Bank is currently projecting 2.2% growth for this year, which already looks optimistic given the weak reading in Q1 of 0.4%. Factor in recent disappointing April data and we can probably expect to see a number nearer to 1.9%.

The main focus though will be on preparations that the Bank is making with respect to market calming measures in the event of significant volatility in the lead up to next month’s referendum vote, after Chancellor George Osborne’s admission to MP’s yesterday that the Treasury was making contingency plans in respect of financial market instability, though he refused to go into detail.

Bank of England governor Mark Carney can expect to field numerous questions on this and the central banks contingency plans in respect of next month’s referendum vote, as he attempts to navigate the minefield of trying not to invite criticism of being partisan in regard to the vote.

EURUSD – the euro appears to have found some support at the 1.1350 area but still needs to push back through the 1.1480 level to argue for a move back towards the 1.1600 area. The major support lies back near the April lows at 1.1220.

GBPUSD – the pound continues to struggle to move through the 1.4500 area, but while the short term base at 1.4360 holds the bias remains for a move higher, towards the 1.4700 area. While last week’s bearish reversal has weighed on the pound downside should remain limited while above 1.4300.

EURGBP – still struggling to push above the 200 week MA and as such the bias remains to the downside while below 0.7950. A move below 0.7860 could well target neckline support at 0.7750 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 – this week’s move up to 109.40 appears to have run out of steam. 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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