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Europe set for lower open, as oil moves higher

oil refinery

European markets closed higher for the second week in succession last week despite there being little prospect of a ceasefire, or imminent cessation of hostilities between Russia and Ukraine.

Volatility levels have slipped back quite considerably from the levels we saw in the immediate aftermath of Russia’s invasion of Ukraine, with stock markets on both sides of the Atlantic posting their best week since 2020.

There appears to be a growing disconnect between what markets are doing and what is happening on the ground in Ukraine and the increasingly brutal measures that Russian forces are taking in trying to wear down resistance to their occupation, including the use of hypersonic missiles.

While markets appear to be focussing on the fact that peace talks are taking place, there is also little evidence that they are actually leading anywhere, given the distance between the two sides in respect of what they will accept, with Ukrainian President Zelensky saying at the weekend that Ukraine wouldn’t give up Lugansk or Donetsk in the east of the country.   

These comments would suggest that a ceasefire remains some way away, let alone any kind of resolution, and with the added increasingly hostile rhetoric coming from Russia’s President Putin, the bloodshed looks set to continue.

While some risks have been mitigated for equity markets, commodity markets continue to chop wildly with oil prices declining for the second week in succession, although we are still higher on the month, and concerns about inflation are still posing awkward questions for central banks more broadly.

Last week the Federal Reserve raised interest rates for the first time since 2018, while indicating that we could expect to see another 6 by the end of the year, with the potential for a 50bps move at the next meeting in May. With Fed chairman Jay Powell due to speak later today we could get an additional insight into the Fed’s thinking after St. Louis Fed President James Bullard called for rates to rise to 3% by the end of this year, as well as a balance sheet reduction plan.

Inflation will certainly be front and centre in the UK later this week, and the Chancellor of the Exchequer on Wednesday when he lays out his spring statement, amidst huge pressure to take measures to protect the most vulnerable in society from the current surge in energy costs.  

As we look ahead to a new week, the last few days have seen markets start to focus more on events in China and its economy there, and less on events in Ukraine, with volatility in Chinese markets outweighing the price swings been seen in European and US markets.  

Last week Chinese vice premier Liu He said that authorities would take steps to be more supportive of financial markets and be more market friendly, calling time on a policy that has seen Chinese authorities crack down on certain sectors of its economy.

The Chinese economy is also being hit hard by surging cases of the Omicron variant, and the resulting lockdowns and restrictions are raising speculation that the People’s Bank of China will have to ease monetary policy in the coming days in order to support the economy.

European markets look set to open lower, taking their cues from a quiet Asia market session which has seen Chinese markets slip back, and oil markets move higher after Houthi rebels targeted various Saudi Aramco oil and gas sites across Saudi Arabia over the weekend. Some production was temporarily disrupted, with the attack another unwelcome reminder of the uncertainty currently affecting global oil markets at this time.

EUR/USD – the 1.1120 area continues to act as a decent area of resistance, with support down near the 1.1000 area. Key support remains down near trend line support from the 2017 lows, at 1.0810. Below 1.0780 opens the risk of a move towards 1.0600.  

GBP/USD – found support at the 1.3000 area last week but we need to get back above 1.3200 to minimise the risk of a move towards 1.2800, on a break below 1.2980. Above 1.3220 targets the 1.3400 area. 

EUR/GBP – failed at the 0.8455 level last week. We need to see a move through the 0.8480 level to kick on towards the December peaks at 0.8580. On the downside we need to break below the 0.8370 level and target 0.8320.

USD/JPY – looks set for further gains towards the 120.00 area, and on towards 121.70, while above 116.20. Interim support at 117.80.  

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