It's been a familiar theme for some time now and it continued yesterday as US yields continued to climb, while the US dollar itself remained under pressure, drifting back towards its recent three-year lows against a basket of currencies.

Not even a relatively hawkish US Federal Reserve statement along with economic data that continues to point to rising inflationary pressure was enough to support it. A strong ADP employment report on Wednesday was followed by an ISM manufacturing report which, while a little softer than the previous month, saw prices paid surge to their highest level since May 2011 at 72.7. Also, an economic tracker from the Atlanta Fed which indicated that US GDP would rise by 5.4% in Q1 didn’t hurt, but it didn’t really chime with a disappointing Q4 productivity report earlier in the day.

The US 10-year yield took another leg higher touching 2.79% at one point, while the 30-year nudged above 3%. Concern about rising interest rates wasn’t confined to the US, as we saw yields rise in Europe as well, which in turn helped push the euro back towards its recent three year peaks above 1.2500.

Earlier this week stocks took a nosedive on concerns about rising rates and this nervousness appears to be manifesting itself in European markets, with the DAX posting its worst fall since November last year yesterday, with the biggest falls led by healthcare stocks after this week’s Amazon, JP Morgan and Berkshire Hathaway announcements.

Having had a decent start to the year it would appear that some investors appear to be undergoing a little bout of vertigo when it comes to stock markets, and while it hasn’t quite trickled through to US equities, due to the weakness of the US dollar, one gets the feeling it wouldn’t take much to tip the wider market into a sharper corrective phase.

This has already happened with European markets, with the FTSE 100 already down on the year and the DAX could well be in line to follow suit as its gains for this year slowly disappear, with a potential open below the 13,000 level this morning. 

January payrolls report

Today’s US non-farm payrolls report for January isn’t expected to undermine the case for higher rates, with expectations of an improvement on a disappointing December report of 148k, with a rise to 180k predicted in spite of a strong ADP report earlier in the week. Unemployment is expected to stay at 4.1%.

It is in the wages data that we could see some further movement. We’ve already seen average hourly earnings move up to 2.5% in December, and further gains are expected in the January numbers with a rise to 2.6% predicted.

In the UK yesterday’s manufacturing PMI numbers for January slipped back a touch from the 56.2 level seen at the end of last year, coming in at 55.3, however in a sign that inflationary pressure was still a significant worry, input prices rose sharply to an 11 month high raising the prospect that headline inflation could stay at or near 3% for a while longer than the Bank of England is currently predicting. This could raise the prospect of a rate rise in the first half of this year.

Today’s construction PMI for January is also expected to soften a little from 52.2 to 52.0 though recent events surrounding Carillion could well drag it down further as the sector goes through a difficult time.  

Forex snapshot

EUR/USD – has moved back up towards the previous highs with the 1.2600 area the next target, the 61.8% retracement level of the 1.3995/1.0340 down move. We still have support at the 1.2320 area and the uptrend continues to remain intact while above this key support.

GBP/USD – the pound looks to be heading back to the previous highs at 1.4340 while we also have the 200 week MA at 1.4385. If we are able to move through here then the 1.4590 area comes into view. We have support at the 1.4200 area as well as the lows this week at 1.3980.

EUR/GBP – continues to find buyers above the 0.8690 area rebounding from 0.8715 yesterday. We need to sustain a move above the 0.8810 area to stabilise or risk a move below 0.8690 which would target 0.8640.

USD/JPY – has the potential to edge back up towards the 110.20 area, with support currently around the 108.40 area. We need to see a move back above the 110.20 area to stabilise or risk further losses towards the 107.30 area and September lows.
 

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