We saw a decent start to the week for markets in Europe yesterday with the exception of Italy where the FTSEMib finished lower as caution over the new Italian government kept investors cautious.

Away from Italy markets chose to focus on a fairly decent payrolls report from Friday while shrugging off the noise coming from Canada over concerns about trade.

US markets also carried over the positive mood from Friday with the Nasdaq once again posting another record close, however markets in Asia were much less exuberant as investors started to become a little more pessimistic about the chances of an imminent breakthrough in the increasingly fractious trade talks. This caution looks set to manifest itself later this morning with a slightly lower open in Europe.

It would appear that with all the uncertainties reverberating around the globe from Trump, ruffling feathers at every turn, concerns about tariffs, political noise from Italy as well as the situation in North Korea, investors are choosing to focus on what they know, which is company earnings, economic data and the outlook for fiscal policy for central banks. It’s all well and good jumping at shadows but until that shadow turns into something more tangible the reflex reaction appears to be buy the dip.

Last week we saw increasing evidence that the European growth story of 2017 was still struggling to overcome the slowdown that we saw in the PMI data in Q1. The manufacturing sector has slipped back every month from the peaks that we saw at the end of 2017, to hit a 15-month low last week, and though activity still remains robust any prospect of repeating the strong performance of last year is looking increasingly remote.

Two weeks ago, the latest flash PMI numbers for the services sector showed that French and German sector activityslowed to their lowest levels in over a year. If this slowdown is confirmed in this morning’s numbers then this could present the European Central Bank with a particularly thorny problem if economic activity starts to slow at the same time prices start to rise.

Spain and Italy services PMI’s are expected to improve modestly from their April numbers which may help provide an offset with expectations of a pickup to 56.4 and 52.9 respectively. This still won’t be enough to offset the slowing of French and German services sector activity which is expected to be confirmed at 54.3 for France which would be a one year low. In Germany economic activity is expected to slow to 52.1 which would be the lowest since September 2016.

In the UK we’ve also seen a slowdown in economic activity in Q1 however there does appear to be evidence of a pickup in some of the latest Q2 numbers with manufacturing remaining fairly steady through Q1 as well as Q2. Construction has been the main laggard but even here activity has picked up after a contraction in March due to cold weather.

The services sector is the one sector that could really make a difference and after a weak March number, due in no small part due to the cold weather we have also seen a modest pickup in April. If activity in May continues this trend then the probability of a significant rebound in Q2 could augur well for an improvement over the rest of the year.

It is expected that we will see a modest improvement to 53 from 52.8 in April, though there is also the very real prospect that we could see a much better number as a result of the great May weather, the two bank holidays, as well as the Royal Wedding, which should have given a lift to the hospitality sector. This lift was reflected in this morning’s retail sales numbers from the British Retail Consortium which saw a rise of 2.8% from a year ago with food sales helping as people took advantage of the good weather with beers and barbecues, while garden centres also did well.

EURUSD – the failure to move through the 1.1750 area keeps the risk for a move back to the 1.1620 area in the short term with broader support at the May low at the 1.1500 which has prompted the current rebound. We need to move through 1.1750 to target a move to the 1.1830 level. A move below the 1.1500 trend line support level opens up a move to the 1.1300 area.

GBPUSD – spilled over the 1.3360 area to 1.3398 before slipping back. We could slip back to the 1.3270 area without undermining the prospect of a move the 1.3460 area. Support remains back at the May lows at 1.3200, with a break targeting broader support just below that at 1.3110 trend line support from the January 2017 lows.

EURGBP – rebounded from the 0.8720 area but still on the broader range with resistance above the 0.8800 area which is currently capping the single currency. The prevailing range remains intact with a break below 0.8690 targeting the 0.8640 area. The 200-day MA at 0.8850 should cap the upside.

USDJPY – still looks well supported while above the 50-day MA at 108.35, the prospect of a move back to the 110.30 level seems a realistic prospect.

CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.