Europe to open slightly higher after late US rebound

CMC Markets

The pound has come under pressure in Asia early on, with some reports suggesting that the Scottish government could look to call another independence referendum sometime next year.

The weakness though may well have also been prompted by other reports that UK prime minister Theresa May could introduce curbs on freedom of movement at the same time as she triggers Article 50 at the end of March. It is reported that any EU national who arrives here after that date would not automatically have the right to stay in the UK permanently. This may set the stage for early disagreements with EU leaders before talks even get under way. 

While the Dow managed to eke out a positive close for the eleventh day in a row, it was hardly a convincing finish given that it spent all but the last five minutes of the entire session in negative territory. Nonetheless it was still the longest winning run since 1992 as investors looked ahead to tomorrow’s speech by President Trump to a joint session of Congress. 

For about three weeks now markets have been awaiting further details on the so called “phenomenal” tax plan that the president promised us on 9 February when he was at a meeting of airline executives. This statement helped push the Dow conclusively through the 20,000 level and up another 3% at a time when the Trump trade was beginning to get a little tired.

We’ve seen similar signs of weakness in the past few days, which weren’t helped by comments last week by new Treasury secretary Steve Mnuchin, when he stated that any tax changes might take several months to outline, let alone implement.

Nonetheless the US dollar still managed to finish the week in positive territory despite a decline in yields which was starting to weigh on the greenback. It does appear that doubts about the timing of the next Fed rate rise are starting to see some slippage away from a March decision, towards either May or June.

This decline in yields, along with some level of risk aversion over the political uncertainty in Europe has helped push gold prices to their highest levels in 4 months.

The weakness in yields is also hindering the euro with the spread between US and German yields at their widest in 18 years, despite German inflation being only slightly less than US inflation.

Concerns about political risk in Europe, particularly in France have driven German 2 year yields to an incomprehensible -0.95%. With German inflation currently at 2%, that equates to a real yield of -3%. German savers will love that!

On the data front today we are expected to get further evidence of the improvement in the US economy with January core durable goods orders which are expected to come in at 0.5%, unchanged from December.

We’ll also probably get some more hawkish chatter from the Dallas Fed President and new FOMC voting member Robert Kaplan, when he speaks later today in Oklahoma. He has been fairly vocal in recent comments about the need to act fairly soon raising the prospect that he could well vote for a hike in March even if the wider committee does not.  

EUR/USD – the euro continues to chop around despite last week’s new low at 1.0493.The bias still remains for a move lower towards the lows this year near 1.0340. We need to recover back through the 1.0680 area to retarget the highs at 1.0800.

GBP/USD – having held above the 50 day MA at 1.2400, we’ve moved back towards the recent high at 1.2580, but this continues to cap gains. We now need to push back through 1.2600 to retarget the 1.2700 area. Only a move below 1.2400 targets the 1.2250 area.

EUR/GBP – we need to push back through the 0.8520 area or run the risk of further declines towards the December lows at 0.8300. The 200 day MA at 0.8485 is also a key area which we need to see a close above to signal a short squeeze.

USD/JPY – starting to come under pressure towards the lower end of the recent range with support at the twin lows at 111.60. A move below 111.50 targets the 110.00 area. We need a pull back above 113.20 to retarget the range highs at 115.00.

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