While concern over a possible trade war between the US and China abated yesterday, prompting a strong rebound in US markets, the turnaround wasn’t reflected in European markets which after a positive open, finished the day sharply lower yesterday, with both the DAX and FTSE100 closing at new one year lows.

The rebound in the US which saw the Dow post its worst week since 2016 last week, saw the US benchmark post it biggest one day gain since 2015, and more than reversed the slide seen on Friday as China moved to assuage US concerns about its trade policies by pledging to open up its markets to external companies. Chinese officials also pledged to overhaul protection for intellectual property rights. There was also an offer to buy more US semiconductors, as well as offering to finalize rules that would allow foreign financial firms to take stakes in Chinese securities companies, along with talk of lowering the tariff that is levied on US car imports of 25%

These concessions while fairly modest would allow the US administration to claim progress on changing the status quo where trade is concerned and could pave the way for further discussions further down the line.

Despite yesterday’s weak finish for European equities last night’s surge in the US is likely to create a placebo effect for European investors this morning with a strongly positive open, however it is becoming something of a conundrum as to why US markets are able to remain fairly resilient while European markets have lagged behind in recent weeks.

One reason could be that while US markets look set to benefit from the recent tax cut stimulus measures, the economy in Europe appears to be starting to slip back at a time when the ECB is starting to ease off the gas. Last week’s softer PMI numbers could also be the beginning of possible micro fissures in the European growth story, which has seen a slight softening of activity since the end of last year.

Whether that softening in data continues remains to be seen but the inability of markets in Europe to match its US counterparts is a concern, particularly when momentum indicators for European investors are already flashing warning signs. 

EURUSD – has moved back through the 1.2400 level and looks set to retest the highs above 1.2500. A move through the highs this year could well open up the 1.2670 area. Support remains back at last week’s lows just above the 1.2250 level.

GBPUSD – remains well underpinned closing in on trend line resistance and the 200 week MA at 1.4270, with a move through here retargeting the previous highs at 1.4345. As long as this level holds we could drift back down to the 1.3980 area. A move below 1.3970 runs the risk of a return to the lows last week.

EURGBP – fell to an 8 month low at 0.8667 last week before rebounding. As such we still seem range bound with the potential for a short squeeze to 0.8820. We need to see a move back through 0.8820 to retarget the recent peaks above 0.8920.

USDJPY – currently moving through the 105.50 area, a key day reversal yesterday has the potential to retarget the 107.20 area at the very least. While below 105.60 we remain susceptible to further losses towards 103.00, and eventually the 100.00 level. 

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