European markets posted their 3rd successive daily decline as markets continued their New Year hangover, after the pre-Christmas euphoria of what was perceived as a December rate guidance pivot from the Federal Reserve.
The FTSE100 had its worst day since August sliding to its lowest levels since late November, dragged down by a combination of poor performance from real estate, basic resources and energy after disappointing Chinese economic data, and the prospect of rate cuts getting pushed further into 2024.
In the last few days, we’ve seen a concerted effort from assorted central bankers in Europe, as well as the US to dial back the expectation of early rate cuts, while a surprise uptick in UK inflation and some solid US retail sales numbers torpedoed the idea that we would see early rate cuts in March.
This recalibration on rate cut expectations has seen bond yields surge, pushing UK 2-year yields back to where they were when the Bank of England last met, while US 2-year yields have rallied by 22bps in the 2 trading days since last Friday’s close.
This week we’ve heard from the likes of the Bundesbank’s Joachim Nagel, Austria’s Robert Holzmann and ECB President Christine Lagarde all pushing back on the idea of an early rate cut, although Lagarde did hold open the possibility of a summer rate cut as she looked to keep the doves onside.
Yesterday’s US retail sales showed that the US consumer had lost none of its appetite to go out and spend rising 0.6%, while the retail sales control group, which is a key component of US GDP, rose 0.8%, and November was revised up to 0.5%.
This suggests that the US economy ended the year on a strong note and pretty much kills the prospect of a March rate cut, with markets now repricing for June.
We already know that the US labour market is showing few signs of cracking with today’s weekly jobless claims set to rise slightly to 205k from 202k, while continuing claims are also at 3-month lows.
While European markets got clobbered yesterday US markets losses were fairly contained despite the sharp rebound in yields, and the US dollar which initially rallied strongly to one-month highs, gave up most of its gains to close flat on the day.
There may be some hope of a respite despite some weakness in Asia markets although we still look set to see another soft open for European markets.
EUR/USD – found support at the 200-day SMA at 1.0840 yesterday. A break below here and the 1.0800 level targets the 1.0720 area. The main resistance remains at 1.1000.
GBP/USD – currently holding support at the 1.2590/1.2600 area and 50-day SMA keeping the upside potential intact. We need to get above the highs last week at 1.2800 to maintain upside momentum. Also have support at the 200-day SMA at 1.2550.
EUR/GBP – slid towards trend line support at the 0.8565/75 area, while we have resistance at the 0.8620/25 area last week. We need to see break either side to signal the next move, with further resistance at 0.8670 and the main support at the December lows at 0.8545.
USD/JPY – achieved the move to the 148.50 level with further gains towards 150.00 a real possibility. Pullbacks likely to find support at the 146.75 level cloud support as well as the 50-day SMA and the highs last week at 146.40.
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