European equity markets had a rather mixed session yesterday, as concerns about escalating trade tensions were offset by an improvement in Chinese economic data for February.

US markets also took a step back with another disappointing session as investors decided discretion was the better part of valour after the recent run higher in the wake of last Friday’s payrolls data.

Concern that the US administration was looking to widen the scope of tariffs to Chinese goods to the tune of $60bn weighed on investors’ appetite for risk, though the declines were fairly moderate. This may have been down to the appointment of Larry Kudlow as President Trump’s new economic adviser, who has stated that he is not a big fan of blanket tariffs, which should make for an interesting discussion with his new boss.

The weakness also wasn’t helped by a rather disappointing set of economic data, as retail sales for February showed a decline of 0.1%, missing expectations of a rise of 0.3%. This was the second monthly decline in a row, further muddying the waters on the resilience of the US consumer. The jobs market may be in rude health, and survey data robust. but US consumers appear to be reluctant to spend their cash.

This weakness rather goes against the prevailing narrative of multiple rate rises this year from the Federal Reserve. If last week’s weaker than expected wages data pushed back the thinking on the prospect of four rate rises this year, then yesterday’s retail sales data rather calls into question the possibility of three. This was reflected in US bond yields slipping back, with the 10 year yield slipping as low as 2.8% at one point.

The lacklustre nature of inflation combined with weak consumer spending is likely to make for an interesting discussion at next weeks Fed meeting, when US policymakers meet to discuss the monetary policy.

The US dollar managed to recover a little late in the day on remarks from Larry Kudlow that he favoured a strong currency, while the euro slipped back on comments from ECB President Mario Draghi that he wanted to see inflation move back to target before considering ending QE.

This could be problematic given that EU CPI is currently at 1.2%, with core prices sitting at 1%. ECB policymakers will be hoping that tomorrow’s final CPI number for February doesn’t weaken any more than the preliminary reading we got last week.

EURUSD – while the euro has managed to stay above the 1.2270 area and 50 day MA, the rebound is starting to get a little tired. If we can’t get back through the 1.2400 level we run the risk of a move back towards the lows. A fall below 1.2260 would suggest a retest of the range lows at 1.2160.

GBPUSD – currently holding above the 1.3920 area but is struggling to push through the 1.4000 area. If we can’t push above the 1.4000 level towards 1.4080 we run the risk of a move back towards 1.3710, this month’s low, and below that at 1.3660.

EURGBP – still finding support at the 0.8840/50 area for the time being, but still remains susceptible to a move towards the 0.8810 area, while below the 0.8920 area.

USDJPY – the failure to sustain a move beyond the 107.20 level this week has seen the US dollar slide back, a failure that runs the risk of a return to this month’s lows. A move below 106.20 retargets the 105.00 area. We need to move above the 108.30 area to stabilise.

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