Despite a negative start to proceedings yesterday European markets staged an unexpected turnaround, finishing higher on the day, despite ongoing concerns about events in Ukraine, largely on the back of some better than expected US retail sales data for March, and a positively received earnings report from Citigroup. This rebound in US retail sales, while welcome has partially been attributed to a pent up demand rebound after flat sales growth for the first two months of 2014, due to the freezing weather. While the 1.1% rise in retail sales is undoubtedly welcome news it certainly doesn’t remove the concerns that investors have regarding the more over valued sectors, which have continued to come under pressure, and as such investors are likely to remain somewhat cautious when it comes to diving back in again. This may well explain why we look as if we could well see a fairly flat European open this morning, as investors keep one eye on events in the Ukraine as EU leaders attempt to come up with something resembling a coherent response. The worry is that the EU’s disjointed and fragmented response could encourage Putin to chance his arm in the hope he can repeat his Crimea tactic, and in turn prompt a more severe crisis. One of the key factors underpinning the pound in recent weeks has been the perception that the strength of the UK economy could well compel the Bank of England to look at increasing interest rates sooner rather than later in order to keep a steady hand on the tiller, particularly in the context of surging house price values, and an expectation of being the best performing economy in the G7. This was particularly true until the Bank dropped the unemployment threshold from its forward guidance and went over to a more qualitative approach to assessing the health of the UK economy, by using a number of different economic indicators to assess the amount of “slack”. Part of the reason that inflation levels have fallen back so sharply from the highs that we saw last year has largely been as a result of the recent strength of the pound, with expectations of another decline in prices in March. Expectations are for a decline in CPI from 1.8% to 1.6%, and the lowest levels since November 2009, which if borne out is likely to see further sterling weakness as expectations of a rate increase would diminish further into the middle of next year. This would be welcome news particularly if earnings data due tomorrow came in above inflation, and would at a stroke start to take the sting out of the cost of living crisis. Despite this retail prices are still well above both measures, but they are also set to decline, coming in at 2.5% year on year, down from 2.7%. Producer prices are also expected to remain benign, which bodes well for a weaker inflation outlook in the next few months, as price pressures down the supply chain remain subdued. House prices on the other hand are expected to continue to rise with a year on year increase of 7.4% expected for February, up from 6.8% in January. Inflation in the US is also expected to remain low in March, but is expected to show a bit of a rebound after a particularly weak February number of 1.1%. A rise to 1.4% in March is expected, which along with yesterday’s recovery in retail sales will keep the Fed on course for another reduction in its asset purchase program at its next meeting at the end of this month. April Empire manufacturing is also expected to show an improvement to 8, from the 5.6 reading seen in March, while markets will be watching out for any comments from Fed chief Janet Yellen when she talks to a financial markets conference later today, just before the US open. EURUSD – a very positive week last week but we still remain short of the recent highs at 1.3970, peaking at 1.3900, and could well start to drift lower. Any pullbacks are likely to find support at 1.3780 and below that at the long term trend line support at 1.3700. GBPUSD – we’ve seen a double tap of the 1.6820 level and as such this area becomes much more important with respect to further progress. Last week we saw the highest weekly close for the pound since October 2008, but we need a move above 1.6880 to put the pound above its November 2009 highs. While below the risk of a pullback towards 1.6555 remains a possibility, on a break below 1.6670. EURGBP – continues to range trade with a cap currently around the 0.8300/10 level. Only a move below the March lows at 0.8205, argues for a move towards the lows this year at 0.8158. The resistance at the 200 day MA at 0.8410 remains a key obstacle to further gains. USDJPY – the next key support remains at the 101.20 area and the March low. A move through 101.20 opens up the 200 day MA at 100.80, a break of which could well see a move towards 98.60. Any recovery now needs to push back through 102.80 to stabilise. CMC Markets is an execution only 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. 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