It’s been a tricky week for stock markets thus far, as investors struggle to weigh up whether the next move is likely to be higher or whether we could start to see a correction from the gains that we’ve seen so far this year.

Today’s military action against Syrian airfields after this week’s chemical gas attack, shouldn’t have been a surprise after Secretary of State Tillerson’s remarks that recent events required a “serious response” however the timing was coming so quickly afterwards. The action adds a complexity to geopolitics that wasn’t there before given Russia’s support for Syria and Trumps pre-election pledges to try and repair relations with Putin.

The US would now appear to be on a collision course with Russia as Tillerson went on to add that there was no prospect that Assad could remain Syria’s leader in light of the use of chemical weapons, and markets in Europe are likely to reflect this escalation in tensions with a lower open and higher gold and oil prices as safe haven assets attract capital flows.

It is therefore no surprise to see that this first week of Q2 has been a cautious one with the latest Fed minutes also tossing in some food for thought regarding the potential for further rate rises against a slimming down of the Fed’s balance sheet.

When this is set against the prospect that the long awaited fiscal stimulus from the new Trump administration may not be anywhere near as significant as first thought, given Speaker of the House Paul Ryan’s comments earlier this week, then is it any wonder that markets are a little on edge at the prospect of a corrective move lower.

We also have the added wild card of future China/US relations at a time when North Korea is misbehaving with regular missile tests in order to create tension in the region. Trump’s comments that the US may well act alone on North Korea if China doesn’t step up are a clear sign of concern that events might get out of control.

The main event today is the March US employment report at a time when the US jobs market appears to be ticking along nicely, after a bumper ADP report of 263k earlier this week.

Fed officials have been at pains to point to the labour market in their deliberations about monetary policy, and while wages and inflation appear to be picking up moderately, there still remains little sign of tightness in the labour market.

This would suggest that wages are likely to remain subdued, and has tempered expectations about the Fed’s willingness to act too aggressively. Minneapolis Fed President Neel Kashkari’s dissent at the last meeting was because of his belief that the US labour market was still short of what could be called full employment.

One of the reasons is likely to be the consistently high month jobs numbers so far this year, while the participation rate has also edged higher every month from a low of 62.6 in November to 63% in February.

The strength of the ADP report would appear to suggest that today’s US employment report could well be equally as strong, though the consensus view remains down at 185k, a significant drop from February’s 235k.

This seems a very conservative estimate given recent correlations between the two reports. Even without them, over the last few months there hasn’t been much more than a 50k gap between the two since October last year, which suggests that we’ll likely see a fairly strong number above 200k, maybe in the region of 230k.

A decent number here along with a rise in the participation rate above 63% would confirm that further slack remains, which in turn places greater emphasis on the wages numbers, which came in at 2.8% in February. If the labour market is tightening we would expect to see further strength in the wages numbers towards 3%. A softening of wages is likely to be US dollar negative.

Before US payrolls we have some significant UK data releases in the form of trade balance numbers, as well as manufacturing and industrial production data for February.

Both industrial production and manufacturing are expected to show a strong monthly performance with significant rebounds in economic activity of about 0.3% after the weak January numbers.

With Bank of England governor Mark Carney also due to speak in London there is scope for some significant movements in the pound, with the risks skewed towards the upside given recent positive data. It would be surprising if he were to talk the pound lower.

EURUSD – currently trading sideways below 1.0700 and while below the 1.0720 area the risk remains for a move towards 1.0600 trend line from the lows at 1.0340. We need to get back above the 1.0780 level to stabilise. 

GBPUSD – currently finding support at the 1.2420 area and 50 day MA. We also have support down near the 1.2350 area, but while above here the risks favour a move higher through 1.2700 towards the 1.3000 area. Only a move below the1.2350 area would call this into question.

EURGBP – continues to find resistance at the 50 and 200 day MA at 0.8590 area for the moment. A move above here retargets the 0.8620 and 0.8700 level. While below the 0.8590 area the risk of a retest of the previous lows at 0.8400 remains. We also have support at 0.8450, trend line from the December lows. 

USDJPY – has had four attempts at the 110.00 area without breaking, however the rallies are getting shallower, and we need to push back through the 111.60 area to stabilise and argue for a return towards the 112.50 area. Only above 112.50 the risk of a move below 110.00, and towards the 108.50 area diminishes.  

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