European markets got off to a cautious start to the week, finishing higher despite talk of tougher sanctions in response to reported Russian atrocities in Bucha, just outside Kyiv.
US markets also underwent a strong session, driven primarily by a strong tech rebound, although it was notable that the domestically-focused Russell 2000 just about made it into positive territory. Oil prices also finished the day higher reversing some of the declines of last week, which came about in response to last week's reserve release and tempered by caution over demand after China locked down Shanghai in response to rising covid-19 infection rates.
Asia markets have taken their cues from last night’s positive US finish, pushing modestly higher while markets here in Europe set to open unchanged from last night's close. The highlight of the Asia session, if we can call it that, is the latest Reserve Bank of Australia rate decision which has seen the central bank change its forward guidance and thus pave the way for a rate rise in the next two to three months, pushing the Australian dollar sharply higher.
The central bank removed the word “highly” when referring to supportive monetary conditions, as well as removing the word “patient” when it comes to reacting to changes in the factors that are driving inflation higher. While this doesn’t mean a rate rise is imminent, it means that we can probably expect a move soon after next month’s May election. It’s unlikely the RBA would move before that given concerns about the politics of such a move so near to the vote. That said, the delay in acting also points to the folly of its stubbornness in being too dovish early on this year when it became plain that it would probably need to move sooner rather than later.
With the US Federal Reserve is likely to have done another 50-100 basis points by the summer, the RBA will probably have to go much faster and harder in order to raise the benchmark off the currently pitifully low and inadequate 0.1% in order to catch up, increasing the risks of a policy shock to the economy.
The recent flash purchasing managers' indices (PMIs) from Germany and France showed that despite rising prices, services activity has remained resilient. This has come about as a result of the easing of covid restrictions more than any immunity from rising costs, which have shown little signs of slowing down.The rise in costs has also been exacerbated by the war in Ukraine, which is manifesting itself in rapid increases in the costs of doing business. Because of this companies will be faced with the prospect of passing these costs on, and while for the moment they seem able to do so that, it's likely to change as we move into Q2. Business and consumer confidence is already on the decline and is likely to deteriorate further.
As such, today's services PMI reading could well be the last hurrah for the rebound in economic activity we’ve seen since the start of the year. France services PMI is expected to rise to 57.4 from 55.5, while Germany services is expected to come in at 55. Italy services is expected to fall to 51.5, and Spain to fall to 54.3.
In the UK, services activity is expected to remain steady at 61.0, however in a worrying sign for Q2, inflation pressures in the sector are at a record high, and look set to rise further. Business optimism on the other hand saw a sharp drop in the recent flash PMI numbers, suggesting that there is rising concern about the growth outlook over the rest of the year. A lot of the recent improvement in the last two months has been as a result of inventory rebuilding as businesses get ahead of rising prices by restocking while prices are lower.
The US PMIs are expected to be more resilient due to slightly lower energy prices, with the services PMI expected to come in at 58.9, while the latest services ISM is expected to improve from 56.5 to 58.5. It's also worth keeping an eye on the prices paid component of this number, given the sharp rise in the corresponding manufacturing prices paid component.
EUR/USD – sliding back towards support with a move below 1.0950 targeting a return towards the 1.0900 area, and towards trend line support from the 2017 lows at 1.0830. Resistance remains back at the 50-day MA at 1.1185 and last week’s high.
GBP/USD – has so far avoided a retest of the March lows at 1.3000, however the lack of a rebound is still a concern after the recent failure at 1.3300. We need to get back above the 1.3180 area, and hold above trend line support from the 1.3000 lows, which sits currently at 1.3080. A break below the 1.3000 area argues the risk of a move towards 1.2800, on a break below 1.2980.
EUR/GBP – has fallen back below the 0.8400 area opening up the risk of a move back to the 0.8320 area. Resistance now comes in at the 0.8420 area, and behind that at 0.8510.
USD/JPY – currently has neckline support at the 121.30 area, with a break below here arguing for a steeper move lower towards 118.00. While above this support area we need to recover above the 123.20 area to retarget the highs at 125.10, and the June 2015 highs at 125.85.