The last two weeks has seen a significant sea change in market sentiment, particularly in the context of future central bank policy. The sell-off in bond markets in particular has been testament to that change, with a sharp rise in yields across the board.

This has also had a negative effect on stocks markets on both sides of the Atlantic, though the effect has been more noticeable in Europe, where we’ve seen declines to two-month lows.

This change of tack has come as a bit of a surprise given the apparent lack of inflationary pressure being seen in commodity prices, as well as in wages, and does appear to have caught markets off balance. With some more inflation data out later this week from across Europe as well as the US we should get a better idea of whether central bankers are serious about raising the prospect of tightening policy or simply jawboning.

This morning’s Chinese CPI data would appear to suggest that inflation continues to remain benign, coming in at 1.5% for June, while factory gate prices rose 5.5%, both unchanged from May’s numbers, though on a month on month basis they fell 0.2%.

US markets still remain in touching distance of their recent record highs after Friday’s positive payrolls report, though the slightly disappointing wages number did take some of the edge off the rebound in US stocks with the Nasdaq in particular continuing to look a little on the heavy side as the technology rebound that has helped drive US markets starts to show significant signs of tiredness.

The big question as we head into US earnings season later this week is whether all this optimism about future stock market gains is based in reality or expectation, with JP Morgan and Citigroup in the banking sector the first of the big names out of the gate on Friday.

In Europe, despite the expectation of a positive open this morning after a positive Asia session, the German DAX has barely recovered from its eight week lows seen at the end of June, as higher yields and a higher euro offset optimism about a stronger European recovery, while UK markets have suffered on the back of weaker than expected economic data, for the month of May, as well as doubts about how recent splits on the Bank of England’s monetary policy will play out in the context of future policy announcements, and a slightly more hawkish tone. 

This apparent change of tack is hard to square with last week’s disappointing UK data, however the uncertainty created by the snap election in June may also have had a part to play in weakness here. This week’s data is likely to paint a more accurate picture of how the UK economy is performing with the latest wages and unemployment data, due out on Wednesday.

US Fed chief Janet Yellen could well add more colour to last weeks Fed minutes, and last week’s jobs report, in the context of a possible start to reining back the Fed’s reinvestment policy when she testifies to US lawmakers on Capitol Hill in her two day semi-annual testimony which starts on Wednesday.

EURUSD – having broken above the 1.1300 area, this is now acting as support for a move back to the 2016 highs at 1.1617, though the 1.1450 area is acting as a bit of a barrier for the moment. A move below 1.1280 could well reopen a move back to the 1.1100 June lows.

GBPUSD – the failure last week at the 1.3040 level increases the prospect of a move back to the 1.2750 area, with support also at the 1.2860 area.

EURGBP – the 0.8865/70 area remain a key resistance and the main obstacle to a move up to 0.8920. While we remain below this key level we could well head back towards the 0.8720 level.

USDJPY – looks to be heading back towards the May peaks at 114.40, while behind that we also have resistance up around the 115.20 level and March highs. Looking overbought so could struggle here with a drift back to the 112.40 level a possibility. 


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