European markets managed to shrug off the negativity of the weakness in US markets to post a modest recovery yesterday after the declines on Tuesday, even in the face of bond yields that show little signs of falling back.
Concerns over rising inflation remain as real as ever, along with worries about how much damage consistently higher prices could do to consumer confidence, as well as wider demand.
US markets despite trying to rebound were unable to hold onto their gains, sliding lower despite US treasury yields coming off their highs of the day to finish lower on the day, unlike German and UK yields which managed to hold up close to their multi year highs.
Markets in Asia also shrugged off the negative finish in the US after China cut another two key lending rates to help support the wider economy, which in turn has seen both the Hang Seng and Nikkei rebound strongly after yesterday’s weak performance. This rebound looks set to percolate into a positive open for markets in Europe
There seems little doubt that the Fed will move on rates in March, and with a meeting due next week, there has been fevered speculation this week that the Fed might go for a 50bps hike when it does finally pull the trigger. This seems highly unlikely given that it is, even now, still adding to its balance sheet. Furthermore, it would be a huge shift from the tone of their communication as recently as the last meeting in December.
The wider concern appears to be over the extent of any balance sheet reduction the Fed might look at implementing, along with the fact that after the move higher in yields seen since the beginning of the year, it might be time for a bit of a pause.
Nonetheless despite the slide back in US yields seen yesterday, concerns about inflation haven’t, and aren’t likely to go away, especially with oil prices continuing to move higher, as they hit another 7 year high yesterday.
UK CPI hit its highest level in 30 years yesterday, at 5.4%, moving above that of Germany, which also saw its CPI confirmed at 5.3%, also at a 30 year high, and likely to move even higher if this morning’s PPI numbers for December show another increase from the 19.2% seen in the November numbers.
Today’s EU CPI for December is likely to be confirmed at a similarly elevated level, coming in at a record 5%, with core CPI expected to come in at 2.6%.
While concerns about further increases in headline inflation are rising in Europe, in the US it's even higher, although there are some signs that it might be plateauing.
In terms of today’s economic numbers, we have the latest weekly jobless claims numbers which saw a surprise jump to 230k at the start of the year, although continuing claims fell to 1.56m and their lowest levels since June 1973
We also have the latest Philadelphia Fed Business Index which is expected to improve on its December activity, although if this week’s Empire Manufacturing index performance is any guide we could see a big miss to the downside.
EUR/USD – slipped back below the 1.1380 level earlier this week and needs to hold below to head towards 1.1280 where we have trend line support from the recent lows. A move below 1.1280 reopens the November lows.
GBP/USD – failure at the 200-day MA and 1.3750 area has seen the pound slip back towards 1.3570. A move below 1.3570 opens up the risk of a move back towards 1.3480, and even 1.3420. We need to break above 1.3750 to signal further gains towards 1.3830 initially.
EUR/GBP – this week’s failure at 0.8380 has seen the euro slip back with a bias towards the 0.8280 level and 2020 lows. Only a move through 0.8380 targets 0.8420.
USD/JPY – rebounded from cloud support at 113.50 earlier this week, but we need to move back above 115.30 to retarget the recent highs above 116.00. A move below 113.50 opens up the 112.80 area.
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