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Cautious start for Europe after US stocks give up gains

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European markets got off to a broadly steady and positive start to the week yesterday, although a sharp rise in Italian borrowing costs appeared to weigh down the FTSEMib.

By and large markets and investors are getting used to the idea of higher rates from central banks, as the stock of negative yielding debt slowly diminishes, and the risk of longer and more persistent inflation prompts a broader recalibration of investor portfolios.

US markets had a generally more subdued day with the Dow, Nasdaq 100 and S&P500 all failing to hold onto their gains, with the Nasdaq acting as a drag on the wider market, while the Russell 2000 finished the day higher.

The Nasdaq continues to be the main driver for US markets and continues to look vulnerable to a return to its January lows, while below the 200-day MA. All the while the S&P500 is holding above its 200-day MA as the tug of war continues between the bulls and bears, as sentiment ebbs and flows.

Having digested what was an unexpectedly good January payrolls report last week, market attention is now firmly fixed on this week's US CPI numbers for January for evidence of whether the upswing in prices we’ve seen in the last three months of 2021 is set to show any signs of easing.

In the last three months of last year US inflation jumped from 5.4% at the end of Q3 to end 2021 at 7% and is expected to continue to rise later this week.

There is also increasing nervousness in Europe about rising prices with ECB President Christine Lagarde last week, refusing to repeat her assertion at the end of last year that interest rates in the euro area would not be rising this year. This position was reinforced by ECB Governing Council member Klaas Knot over the weekend when he said he expected the first rate rise to come in Q4 of this year.

Lagarde’s hawkish shift of last week was dialled back a touch yesterday in comments to the European Parliament, when she said it was premature to talk in terms of rate hikes yet, despite the shift in the inflation narrative.  

After last night's subdued US finish, today's European open looks set to be a cautious one, after US stocks once again failed to hold onto their early day gains.

EUR/USD – currently have resistance at the 1.1485 level. A break above the 1.1500 area retargets last November’s highs at 1.1615. To see further gains we need to hold above the 1.1380 area for this to unfold with firmer support at the 1.1270 area.  

GBP/USD – continues to slip away from the 1.3600 area, with a break below the 1.3470 area potentially targeting a retest of the 1.3400 area where we have trend line support from the December lows. A break above 1.3620 retargets 1.3720.

EUR/GBP – slipped back from the 0.8480 area, while we have wider resistance at the 200-day MA at 0.8510. Support comes in at the 0.8420 area.

USD/JPY – currently finding resistance at the 115.50 area, with support at the 114.70 area. The January peaks at 116.35 remain in sight on a break above 115.70. While below 115.50 the risk is for a move lower towards 114.20.

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