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Europe set for a pause after two days of strong gains

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After the uncertainty of the last two weeks, the price action of the last two days has been almost chalk and cheese, with the FTSE100 recovering all of its post-Thanksgiving Omicron losses and closing at its highest level since 15th November.

US markets also posted strong gains for the second day in succession, with the Nasdaq posting its biggest one day gain since March.

This week’s price action so far has been a complete contrast to last week’s schizophrenic back and forth. The last two days have been ones of unbridled optimism that for all the concerns about Omicron, there is a growing hope that for all the concerns about its greater transmissibility, that any fallout is likely to be mild, and that when it comes to hospitalisations and deaths, the outcomes are likely to be better than Delta.

While all of this comes with a healthy degree of caution, we are almost two weeks from when the first reports started to come out of South Africa, and thus far there appears to have been no direct causal links to any deaths. This doesn’t of course change the dynamic when it comes to how Europe is battling against the increases being seen in Delta cases, and which is likely to hamper the recovery across the likes of Germany, Austria and the Netherlands where restrictions and lockdowns have been reimposed.

These concerns over Delta were acknowledged earlier this week by the IMF who warned that they might have to cut their GDP forecasts for the eurozone when they publish new estimates in January.

The gains in equity markets we are seeing are all the more surprising given that they are coming against a backdrop of rising inflationary risk, and central banks that are likely to start withdrawing some of their monetary policy support in the weeks and months ahead.

Today’s European open could well see a modest pause on a day that is fairly data light, and where the keynote number this week is on Friday with US CPI for November, which could see a big jump from the 6.2% in October to a number close to 7%.

Yesterday the Reserve Bank of Australia became the latest central bank to resile from an overly dovish tone, prompting a sharp rally in the Australian dollar, although we’ve been overdue a rebound for some time now.  

Today it’s the Bank of Canada’s turn to meet to set out its stall on monetary policy. In October, the central bank ended its asset purchase program, while on Friday we saw an extremely solid jobs number for November adding 153.7k jobs, sending the Canadian dollar sharply higher. Today’s meeting is unlikely to give any firm signalling on when a possible rate rise might come, given the Omicron situation, but markets are already betting one could come as soon as March.

It will be also interesting to see if the bank modifies its view on inflation, and how long they expect it to remain elevated, and how much of it they think is still transitory.

As far as other data is concerned, we also have the latest US job openings numbers, or JOLTS for October, which are expected to remain at around 10.4m, throwing into sharp focus the weakness of last week’s headline number on the US November payrolls report.

EUR/USD – continues to slip lower, with resistance at the 1.1385 area. The key support remains at the November lows at 1.1185, as well as the 1.1160 level. A move through 1.1420 argues for a move back to the 1.1520 level.  

GBP/USD – currently holding above the bottom of the channel just below 1.3200 near to the 1.3160 support, with the lack of a rebound a bit of a concern. A break of 1.3160 opens the 1.3000 level. We need to recover back above the 1.3400 level to stabilise and move towards the 1.3500 level.

EUR/GBP – slid back from the 200-day MA on Monday as well as trend line resistance from the September 2020 highs, at 0.8560. Support remains at the 0.8480 level and needs to break below this level to diminish the risk of further gains.

USD/JPY – the 112.50 level still looks solid for now, but the rebound being seen needs to overcome the 114.00 area to target a move back to the previous peaks above 115 00. A move below the 112.50 level targets the 111.80 area.


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