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Europe set for positive start as Fed sticks to outcome based guidance

watching markets move higher

European markets underwent a slightly more subdued session yesterday, with the FTSE250 taking centre stage with a record high, while the FTSE100 moving back close to its highest levels this year. The rest of Europe’s markets finished slightly lower, albeit with the DAX and Stoxx600 still within touching distance of their record peaks of earlier this week.

US markets also traded in a fairly modest fashion with the S&P500 eking out a record close as investors adopted a cautious approach with stocks trading close to record highs.

This fairly benign and optimistic environment is expected to see a positive open for markets here in Europe as investors absorb last night's Fed minutes.

The minutes from the March meeting showed that while Fed officials seemed happy with the direction of travel of the US economy, they wanted to see much clearer evidence of further progress before dialling back on the stimulus button.

This adherence to what the Fed now calls “outcome-based guidance” is all part and parcel of the US central bank’s new policy of not reacting to perceptions of a direction of travel, but waiting until both goals of higher inflation and full employment has been achieved.

While this is all well and good for now with US 10-year yields retreating from their recent highs it should be remembered that last night’s minutes came before last week’s bumper payrolls report and very positive ISM updates.

These reports bode well for further strength in Q2, and while the Fed wants to give the impression of a central bank that is prepared to be patient, waiting too long also presents dangers.

The latest February consumer credit numbers were quite simply stunning, rising $27.6bn, the biggest monthly gain since November 2017, and well above expectations of a $2.8bn rise. The numbers were even more surprising given that retail sales for February declined 3%.  

This huge rebound in borrowing helps to tie in with the recent surge in consumer confidence, and with March retail sales due out next week, along with the uplift provided by the new stimulus payments we could see a big number after the 3% decline seen in February.

It probably seems like a sensible strategy of not wanting to be seen to be trigger happy when it comes to tapering asset purchases, however the risk is that if the Fed keeps too loose a grip on the reins the horse might slip its leash and run amok, before collapsing in a heap.

Today we get to see the latest weekly jobless claims numbers, which after rising unexpectedly back to 719k last week are expected to fall back to 680k, after hitting a revised 658k a couple of weeks ago. Continuing claims are also expected to decline further to 3.65m.

The pound had another poor day yesterday, sliding back sharply against both the euro and the US dollar as its impressive run of gains came to a shuddering halt, despite increasing evidence of an improving economic environment as the UK economy gears up for a further loosening of restrictions next week. Yesterday’s services PMI looked solid with evidence that broader hiring trends within the UK suggesting the prospect of a solid rebound in job vacancies as we head into the summer.

Today’s economic data is expected to see UK construction PMI for March to come in at 55, an increase from 53.3 in February.

EURUSD – squeezed up beyond the 200-day MA before running out of steam just shy of 1.1920. Has since slipped back. While we remain below the 1.1920 area the risk remains for a move back to the recent lows at 1.1704.

GBPUSD – continues to look a little on the soft side, with support at the 1.3710 area, and below that at 1.3670. A move through 1.3650 opens up the 1.3550 area. A move through 1.3920 retargets 1.4020.

EURGBP – squeezed all the way back through the 0.8620 area raising the prospect that we could see further gains towards 0.8730. The 50-day MA is capping for now with any dips needing to hold above the 0.8540 area.   

USDJPY – fell just shy of the 111.00 area last week, and has since slipped back below the 110.20 area, which now becomes resistance. We’ve slipped back towards 109.50 and could head lower towards 108.70, while below the 110.20 area.

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