European markets underwent a subdued start to the week yesterday, with the FTSE 100 outperforming on the back of another day of advances for crude oil prices, pushing the index to close at its highest level since 28 February.
The main reason for the move higher in oil prices was reports that the EU was considering implementing a full-scale embargo on Russian oil later this week, while Ukraine rejected an ultimatum by Russia to surrender the port city of Mariupol or face the consequences. The penny appears to be finally dropping that there is little chance of an imminent breakthrough in so-called ceasefire/peace talks between Ukraine and Russia.
The DAX found itself on the back foot after the Bundesbank downgraded its outlook for the German economy, for the rest of this year, due to the effect of higher energy prices.
US markets also slid back after Fed chair Jay Powell said that the Federal Reserve wouldn’t hesitate to raise rates by more than 25bps if needed, opening the door to not only one hike of 50bps, but several hikes of similar magnitude in order to bring inflation under control. He went on to say that the central bank would act based on how much progress was being made in bringing inflation back to target, and not assume it will come lower all by itself as supply chain concerns decrease. Powell’s tone in this regard appears to draw a line under the transitory narrative of six months ago, and suggests the Fed is likely to err on the side of tightening too quickly, rather than by not enough.
Consequently, US bond yields pushed even higher, with the 2-year yield blasting through 2% for the first time since May 2019, while the 10-year yield also moved higher, pushing the spread between the two to the narrowest since March 2020, while the US dollar pushed higher, hitting a six-year high against the Japanese yen, and above the 120 level for the first time since February 2016.
Despite yesterday’s modest decline in US markets, today’s European open is set to be a mixed one, with the only data of note coming from the UK. Today’s UK public sector borrowing numbers are expected to reinforce the narrative that the chancellor of the exchequer has room to be a little generous when he gets up to deliver his spring statement tomorrow in the House of Commons. Better-than-expected tax receipts look set to show that borrowing is expected to come in as much as £23bn lower than forecast a few months ago. Higher-than-expected tax receipts along with a more resilient UK economy has helped in that regard.
With soaring energy prices set to more than double energy bills over the next 12 months, Rishi Sunak is faced with a double whammy of a slowing economic picture, as well as higher interest rates due to rising inflation, although it’s important to remember the UK isn’t unique in facing this. Public sector borrowing is expected to show the government borrowed £8.4bn in February, well below the £15.3bn a year ago. Nonetheless any relief offered tomorrow is likely to be a small price to pay compared to the damage to the UK economy if he does nothing.
EUR/USD – the 1.1120 area remains the key area of resistance for a move up towards the 1.1250 area. Has broken below near term support down near the 1.1000 area. Key support remains at trend line support from the 2017 lows, at 1.0810. Below 1.0780 opens the isk of a move towards 1.0600.
GBP/USD – if we can sustain a move above 1.3220, we could well see a move towards 1.3440. We currently have support at the 1.3000 area and need to hold above that to minimise the risk of a move towards 1.2800, on a break below 1.2980.
EUR/GBP – having failed at the 0.8455 level last week we’ve continued to drift lower with support now at 0.8320. We need to see a move through the 0.8480 level to kick on towards the December peaks at 0.8580.
USD/JPY – has moved up through the 120.00 area, and on towards 121.70. Support now comes in at 119.20, and below that at 117.80.