After a decent run of gains over the last few weeks the US dollar appears to be starting to show signs of looking a little tired, with a little bit of a sell-off in the latter part of last week. The inability of the US 10-year yield to obtain a foothold above the 3% level may also be a bit of a warning sign that we might be due a pullback.

The same might be said of European markets which have seen seven successive weeks of gains, their best run of advances in nearly three years, while US markets posted their best week of gains since early March.

Despite the strong run in Europe we remain shy of the highs that we saw earlier this year, and while the rally that we’ve seen from the March lows has been impressive there are some warning signs that momentum in terms of the growth story may well be starting to slip back.

The recent weakness in the value of the euro has also been a bit of a help with respect to the recent rebound, as has been the rise in the oil price on rising demand against a backdrop of declining inventory. This has seen oil prices rise to within touching distance of $80 a barrel, an almost 20% rise since the beginning of the year, with last week’s surge also gaining a tailwind over concerns about the effects of the US pulling out of the Iran nuclear deal, the reimposing of sanctions, as well as rising concerns over increasing tension between Israel and Iran.

We’ve also seen investors shrug off concerns about economic upheavals caused by US trade policy, however they remain a clear and present risk to the current investment backdrop, despite President Trump’s weekend intervention over sanctions on Chinese telecoms company ZTE, as does further increases in the price of oil, which has thus far not manifested itself in some of the recent headline inflation numbers.

This lack of inflation appears to be lowering expectations that central banks, which had been expected to start the process of retreating a little from their respective stimulus measures this year, might not be able to step back as much as had been expected at the beginning of the year.

Last week we saw headline inflation come in softer than expected in China, and the US, while the Bank of England revised its inflation forecasts lower for the next three years. This week’s final EU CPI numbers could well reinforce that narrative and put further downward pressure on yields, making it more difficult for the ECB to telegraph its intention more clearly as to the timing of its scaling back of its bond buying program.

As we start the beginning of a new week Italian politics could retake centre stage as the leaders of the populist Five Star and Lega parties are reported to very close to agreeing to form a new coalition government, over two months since the recent election produced a deadlocked parliament. Policies include a 15% flat tax as well as a universal basic income for the poorer elements of Italian society and a lower retirement age.

While the two parties make unlikely bedfellows and it is not clear who any new Prime Minister will be, it is reported that the two party leaders, Luigi di Maio and Matteo Salvini will meet the Italian President later today. Any new program if implemented could well bring any new Italian government into conflict with EU budget rules.

So far market reaction has been muted to the prospect of an agreement, though Italian bond markets did fall sharply last week with the 10 year yield rising 12 basis points over the week, to just shy of 1.9%.    

EURUSD – last week’s reaction off the lows at 1.1820 could prompt a bit of a pullback in the coming days towards the 200-day MA above the 1.2000 area. The next key support area remains down near the 1.1780 level, as well as the December lows at 1.1710.

GBPUSD – has found some support near this year’s lows at 1.3460 for now. However we need to overcome the 1.3620 area to stabilise. A failure to do so invites further losses towards the 1.3300 area in the medium term.

EURGBP – last week’s rebound needs to overcome the 200-day MA at 0.8880 to indicate potential for further gains While below resistance at 0.8850 the same range we’ve been over the last few weeks, is likely to prevail with support at 0.8740 and the 0.8680 area.

USDJPY – currently finding resistance up at the 110.00 level last week, which is keeping the upside contained. We also have key resistance up at the 200-day MA at 110.25, with trend line resistance at 110.50 behind that. Support remains back at the 108.70 area. A move beyond 110.50 opens the 112.00 area.

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