While European markets managed to eke out small gains yesterday, the early buying momentum soon gave way to rising nervousness about further geopolitical concerns after the US imposed wide ranging financial sanctions on a range of Russian assets in response to claims of Russian interference in the US election in 2016.
Some investors appear to be already taking the view that these measures may well be contained and not extended further, but that rather ignores the fact that these could only be the start, given recent events in Syria, and the alleged use of chemical weapons, and President Trump’s comments that there will be a “big price to pay”.
Coming on the back of events in Salisbury last month and the use of a nerve agent there, and the fact that renowned Russia hawk John Bolton started his role as National Security Advisor in the White House yesterday, the risk is that last weekend’s measures may only be the start to financially ostracise Russia.
US markets also finished the day higher, helped by the slightly softer tone from President Trump and his officials towards China at the weekend and the prospect of a positive outcome, but again the rebound was limited on reports that the FBI had raided the offices of President Trumps personal lawyer Michael Cohen, which prompted US markets to slide back abruptly from their intraday highs.
Once again it is the background noise that is driving short term sentiment with big swings intraday making the price action difficult to predict, and once again it has been comments overnight that has driven the direction of markets in Asia after comments from Chinese leader Xi Jinping at the Bo’ao forum. His pledges to open up China’s economy and lower import tariffs, while nothing particularly new, sent Asia markets higher and are likely to translate into a positive European open this morning. Whether they translate into anything other than words is another story but for now they appear to signal a willingness for China to move forward the discussions on trade with the US.
Despite all of these wild swings, above all else for now, one factor appears to be underpinning US markets, and that is the 200 day moving average.
In spite of all of the recent volatility both the S&P500 and Dow Jones have remained above this key metric, as well as the lows seen in February, and while they do so, the prognosis should remain positive.
That calculus might well have to change if these levels were to give way, as they have with every other global benchmark, as global stock markets continue to act as the pressure valve for geopolitics.
The start of US earnings season later this week could also have a big part to play in the direction of the next move.
EURUSD – continues to trade within the wider 1.2200/1.2500 range that has constrained the price action for much of this year. We need to see a break below 1.2160 or a break above 1.2540 to suggest a strong move in either direction.
GBPUSD – remains underpinned moving above last week’s high and back within range of trend line resistance at 1.4205, as well as the 200-week MA at 1.4270, which is keeping a short term lid on the pound. We have support at the 1.3970 area and below that at 1.3720.
EURGBP – continues to look a little soft finding support just above the 0.8700 area with longer term support at last month’s low at 0.8667. We need to see a move back above the 0.8820 level to signal a move back to 0.8920. We have short term resistance at the 0.8750 area.
USDJPY – finding resistance up at the 107.50 area last week and is struggling to break higher. A move through 107.50 retargets that 108.20 area. The 105.20 area remains a key support with a break below 105.00 opening up a move towards 103.00.
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