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Europe set for higher open as yields stabilise

Yesterday the DAX closed at a record high, while the FTSE100 posted its best one-day gain in over a week, closing at its highest level in almost a month driven primarily by a strong performance from the energy sector.

There was also an undercurrent of optimism that the Chinese government might be on the cusp of signalling a new stimulus package in the lead up to Chinese New Year, which starts this weekend.

A modest rebound in bond markets which pulled yields down from their recent highs also helped the more positive mood, along with a pullback in the US dollar.

US markets on the other hand underwent a rather more mixed session with the Nasdaq 100 losing ground after failing to put in a new record high.

The events of the last few days which has seen markets try and absorb the fact that rate cuts might have to wait until much later in the year, and what any delay means for asset prices and valuations.

While Powell’s candour in ruling out a rate cut in March caught markets by surprise this week also offers an opportunity to see if other members of the FOMC share his mindset.

So far, we’ve heard from Neel Kashkari of the Minneapolis Fed who isn’t a voting member this year, urge caution when it comes to cutting rates. Yesterday Cleveland Fed President Loretta Mester followed suit by also urging caution on rate cuts, and says she still leans towards three rate cuts in 2024.

Today we get to hear from the new Federal Reserve Governor Adriana Kugler, Richmond Fed governor Barkin and Federal Reserve Governor Michelle Bowman.

Bowman is already on the record as saying that she thinks it's too soon for the Fed to consider cutting rates in comments made at the end of last week, while the views of the other two aren’t yet known in light of the recent strength of the economic data, although Barkin prior to last week didn’t want to rule March out completely. Given recent data he may well have revised that view.

The US dollar also pulled back from 12-week highs yesterday, with the decline against the Japanese yen the most notable on reports that the Bank of Japan is on track to shift monetary policy in April and set the scene for an end to NIRP, as well as looking at other policy areas. These reports prompted some yen gains with the US dollar falling back from the 149.00 level.

The euro is also set to be in focus with the latest German industrial production data for December expected to show a decline of -0.5%. Yesterday factory orders saw a surprise 8.9% increase in December, although much of that was to do with one-off factors including the delivery of aircraft parts.

EUR/USD – finding support at 2-month lows at the 1.0720 area. Below 1.0720 risks further declines towards 1.0580. Resistance now comes in at the 1.0780 area and behind that at the 1.0900 area.

GBP/USD – finding support at the 1.2520 area but needs to push back above 1.2620 to stabilise. The break below 1.2600 raises the risk of further declines towards 1.2430, which would retrace 50% of the rebound from the October lows at 1.2035.

EUR/GBP – pulled back from the resistance area at the 0.8570/80 area, with a break targeting the 0.8620 level. While below this resistance the risk remains for a move towards 0.8470.

USD/JPY – has pulled back from the 148.90 area, the inability to crack 149.00 prompting some profit taking. Below 145.80 targets the 200-day SMA at 144.30.

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