European markets look set to record their first weekly decline since March, breaking a run of eight successive weekly gains on the back of increasing uncertainty over trade talks between the US and China, rising concern as to what sort of Italian government we might get, as well as some weaker than expected economic data from France and Germany this week.

Yesterday’s sell off was given an added push on news that President Trump had unilaterally decided to cancel next month’s summit with North Korea in Singapore, pushing back on aggressive rhetoric earlier this week from the regime, accusing them of “tremendous anger and hostility.” This followed on from a decision by the US President to implement an investigation into motor vehicle imports into the US on national security grounds.

The last two days has seen a rapid turnaround in sentiment as a number of different factors, geopolitical as well as economic, appears to have prompted of offered up the opportunity for investors to lock in some gains after the outperformance of the last few weeks. In reality not much has changed in terms of economic or political backdrop, however sentiment can be fickle so the big question now is whether this change could prompt a much broader unwind of risk over the next few days, or present another buying opportunity?

There appears to be some concern that the slowdown seen in some of the Q1 data in Europe may be spilling over into Q2, after weak April surveys from Germany and France this week. Today’s German IFO survey for May might well go some way to either assuage those concerns or reinforce them.

Last month a change of methodology saw the number of firms surveyed expanded to 7,000 as businesses from the services sector were added to the April numbers, and these make up a great proportion of the German economy.

Markets were expecting a reading of 104.7, however the number disappointed, coming in at 102.1, raising concerns about the prospects for a rebound. If this week’s slowdown on the German services PMI is repeated in today’s IFO number then we could well see a number below the 102.00 that is expected.

In the UK the pound managed to post a fairly positive day after retail sales for April rebounded 1.6%, well above expectations, and more than reversing the 1.1% weather related decline seen in March, coming in well excess of estimates. While the rebound was welcome there were still some weak spots, with clothing a significant drag.

There still remains a sense that April’s rebound was a natural consequence of March’s underperformance and that is no doubt true, but there is also an element of seasonality as well.

For the last three years a poor March has been followed by a strong April recovery, and Easter no doubt plays a part in that. The key test will be the numbers for this month, and here the omens look positive. This week the latest CBI reported sales numbers were better than expected and there is bound to be an uplift from the Royal Wedding and the recent warm weather over the May Bank Holiday weekend.

This should be positive for a significant rebound in Q2 GDP, while Bank of England deputy governor Dave Ramsden also warned that domestic CPI pressures were starting to strengthen again in comments made yesterday.

Today’s second estimate of Q1 GDP is expected to come in at 0.1% unchanged from the previous estimate and given the poor weather in March it would be a surprise if any of the other indicators were revised higher, though we could see exports revised up to 0.5%.

EURUSD – continues to slide back falling below the December lows at 1.1710 as we look to head towards the 1.1600 area. We would need to see a pullback overcome the 1.1830 area to stabilise and argue for a return to the 1.1920 level.

GBPUSD – after this week’s low at 1.3305 the pound has tried to rebound but it needs to recover back through the 1.3480 level to stabilise. It still has the potential to fall back towards 1.3110 trend line support from the January 2017 lows.

EURGBP – currently capped at the 100-day MA just below the 0.8800 level, but we need to push below the 0.8710 level to open up a return to the 0.8690 area and the recent lows at 0.8640. A push through the 0.8800 level targets the 0.8845 level.

USDJPY – continues to come under pressure having failed to recover the 110.00 area, we could head back to the 108.70 level. We need to move back through the 110.20 level to reopen the 111.00 area.

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