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Europe set to start February on the front foot

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In a month that saw some wild price swings, European stocks finished their worst month since October 2020, in subdued fashion, closing modestly higher. The FTSE100, although finishing the day slightly lower, managed to set itself apart, by posting its second positive month in succession.

US markets also finished January on a strong note, led by strong rebound from the Nasdaq 100, although that wasn’t enough to prevent the biggest monthly loss since March 2020.

There remains a great deal of uncertainty over the glide path for monetary tightening after last week's Fed rate meeting, with incessant speculation about the number of possible rate hikes we might get to see this year. The consensus now appears to be between 4 or 5, although some forecasts have come in as high as 7, as we get the equivalent of rate hike bingo to see who can outdo each other when it comes to forecasts.

While bond markets continue to get buffeted by all manner of forecasts, the reality is we’ll probably be lucky to see 3 rate rises, but it's always fun to spin the roulette wheel of speculation.  

Over the weekend Atlanta Fed President Raphael Bostic stoked speculation of a 50bps rate move by suggesting that he wouldn’t rule it out. Yesterday he rowed back on that by saying that it wasn’t his preferred option and that he was still in the camp of 3 rate hikes this year.  

This intervention served to pull rates off their highs of the day, thus helping to push US stocks to their highs of the day, as well as prompting a sharp sell off in the US dollar.

With last week's Fed meeting now in the rear-view mirror FOMC officials now have free rein to speak their minds again, and they were certainly doing that last night.

We also heard from Kansas City Fed President Esther George, pushing the line of gradual rate rises, with no unexpected adjustments, which roughly translated suggests that she isn’t in favour of a 50bps point move either. Mary Daly of the San Francisco Fed also echoed the slow and steady path, with no unexpected surprises.

In Asia the RBA left interest rates unchanged, as well as calling time on its QE program, which was in line with expectations, while also upgrading its forecasts for inflation. The bank was cautious about the prospect of raising rates emphasising it would be patient. This would suggest it is only a matter of time before Governor Philip Lowe, has to concede that the RBA will have to hike rates before its previous 2023 guidance.

As we look towards today’s European open, we look set to start February on the front foot after yesterday’s strong US finish, with the focus on the latest manufacturing PMIs, as well as some key UK lending data.

One of the more notable items to take from yesterday’s Q4 GDP data was how well the Italian and Spanish economies did, outperforming both France and Germany. This is expected to continue in this morning’s latest manufacturing PMI data for January. Italy manufacturing PMI is expected to come in at 61.2, slightly down from 62, while Spain manufacturing PMI is expected to come in at 56.

No changes are expected in the France and Germany flash readings of 55.5 and 60.5.

The latest UK data for December is expected to show a sharp slowdown in the wake of the Plan B restrictions imposed midway through the month.

Consumer credit is expected to slow to £0.4bn from the big jump seen to £1.2bn in November, as people ordered early for Christmas, and then reined back their spending, as well as staying in to safeguard their Christmas get-togethers. Mortgage approvals and lending are expected to remain steady at 66k and £3.5bn.

Manufacturing PMI is expected to be confirmed at 56.9, a modest slowdown from 57.9 in November.

In the US the latest ISM manufacturing report for January could well offer a signpost to Friday’s jobs report, particularly in the context of the employment and prices paid components.

Over the last two weeks consensus estimates for Friday’s report have been revised down from 238k to 150k, with some estimates suggesting we might see a negative headline number, due to Omicron disruption.

EUR/USD – yesterday’s sharp rebound from the 1.1125 lows has seen the euro pull back above the 1.1200 area, but we need to break above 1.1270 to spark the potential for a move towards 1.1380, and delay a move towards 1.1000.  

GBP/USD – having found support at the 1.3350 the pound has rallied, pulling back above the 50-day MA and 1.3430 area, but we need to get back through the 1.3450 area to open a move towards 1.3520.

EUR/GBP – continues to find support at the 0.8305 level, which suggests the potential for a move back towards the highs at 0.8420. Below the 0.8300 argues for a move towards 0.8270.  

USD/JPY – has pulled back from the 115.70 area, with support at the 114.70 area. A break below 114.50 opens up the prospect of a retest of the recent lows at 113.80.


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