Yesterday saw a much more cautious day for markets in Europe as the positive sentiment from Wednesday gave way to claim and counter claim about Russian troop movements, on the Ukraine border.
With the Russians saying one thing, and NATO and the US pushing back, saying that Russian troop numbers are rising near the Ukraine border, and that no de-escalation appears to be happening, markets are increasingly becoming susceptible to headline risk. This means the phoney war is likely to continue until such time as Russia either de-escalates or decides to push into Ukraine.
Last night’s Federal Reserve minutes didn’t really add to the sum of overall knowledge about Fed policymakers’ intentions with respect to raising rates, as well as reducing the size of the balance sheet. It’s widely accepted that rates will rise in March, however markets are currently split between whether the Fed will move by 25bps, or by 50bps. Nonetheless, based on those minutes, US markets took the positives from the fact that there wasn’t a significant quorum of policymakers in favour of a 50bps rate rise, closing well off their lows of the day.
The problem with that logic is that last night’s minutes predate a host of economic reports that not only point to a stronger-than-expected US economy, but also surging inflation. We’ve seen US non-farm payrolls come in much stronger than expected, a better-than-expected Q4 GDP report, CPI inflation at a 40-year high, and a strong retail sales report for January
Are investors really assuming that none of these economic reports has shifted the calculus towards any of those members changing their minds and deciding to lean towards 50bps? If so, this seems rather naïve, despite recent comments from some more of the dovish members of the committee, with next week’s PCE core deflator number likely to push well above 5%. Pricing for a 50bps move in March is now very much 50/50, with a strong PCE number next week, followed by a strong payrolls number the week after, likely to add to the mix.
Of course, events in Ukraine could undermine all of this in the event hostilities break out. The decline in oil prices for the second day in a row yesterday suggested markets were leaning towards giving Russia the benefit of the doubt, however that may not last. Despite yesterday’s rebound by US markets, which saw stocks pullback most of their intraday losses, today’s Europe open looks set to be a negative one after unnamed US officials briefed that Russa had added another 7,000 troops to their number, contrary to their claims they were pulling back, and this appears to have tipped Asia markets lower.
Today we have little in the way of data to focus on, other than the latest US weekly jobless claims, which are expected to fall back from 223,000 to 217,000, with continuing claims falling back to 1.6m. This means we are likely to once again be susceptible to headline risk from Eastern Europe.
EUR/USD – we need to get back above 1.1420 to retarget the highs at 1.1485. A move below 1.1270 retargets the lows this year at 1.1120.
GBP/USD – edging back towards the 1.3600 area, but we need to sustain a move above 1.3620 to target the 1.3720 area. Support comes in at trend line support at 1.3440, from the December lows, as well as the 50-day MA.
EUR/GBP – slipped back from the 0.8400 level yesterday. We need to see a move above the 0.8410/20 area to diminish downside risk. While below 0.8420, the bias remains for a to a retest of the 0.8280 lows earlier this month.
USD/JPY – still have support at the 115.00 area but needs to move above the 116.35 area to open up 117.50. If we drop below the 114.70 area we could slip back to 113.80.