While US markets have been able to achieve new records on an almost weekly basis in recent weeks, markets in Europe have continued to be constrained by political risk and this may well not change in the short to medium term, despite some evidence of an improving economic outlook, across the globe, as Asia markets built on Friday’s US gains.
At the end of last week we saw a significant improvement in the appetite for risk, with a trifecta of factors helping US markets once again close at new record highs. The end of week momentum started with US President Trump’s announcement that we could expect to see something “phenomenal” on taxes in the next two to three weeks.
While on its own this is welcome news given we’ve heard little in the way of details since the inauguration three weeks ago, it has raised investor hopes that the new President does have a plan. Whether he delivers on it is another matter entirely, but we’ll have to wait and see.
In the meantime though we may have witnessed a softening of the “bull in a china shop” type of rhetoric towards China after reports that President Trump had spoken to Chinese President Xi and said that he would stand by the “one China” policy that had been the baseline for US foreign policy for many years.
This apparent change of tack would appear to suggest that the new US administration could well be starting to adopt a more pragmatic softly, softly approach to foreign policy. Maybe President Trump is slowly realising that he can’t win every battle and that to try and do so is unrealistic, though this new approach could face an early test after North Korea tested a new ballistic missile over the weekend.
The weekend meeting with Japanese Prime Minister Shinzo Abe also went without incident, even if the Japanese Prime Minister was left counting his fingers afterwards as a result of a rather firm handshake. The President also reiterated the US’s strong support for Japan in the face of the North Korean missile test.
The remaining factor helping boost sentiment was better than expected Chinese trade data, with both imports and exports coming in better than expected, which helped propel iron ore to two year highs and copper prices up through the 200 week MA for the first time in four years, in February 2013.
This week isn’t likely to provide any let up with US Federal Reserve chief Janet Yellen due to spend the early part of the week in front of the Senate Banking Committee, as well as the House Financial Services Committee. While clues about rate hike timing are likely to be on the agenda, so will the plans of the new Trump administration for Dodd Frank reform, with the Fed President likely to come under pressure from Texas Republican Jeb Hensarling, who isn’t a fan.
Also on the agenda this week, we have a week heavy with economic data from across the globe, but it will be the latest inflation CPI numbers from China, the UK, Germany and the US, which will be of particular interest. These are all expected to come in much hotter than last month due to the rise in energy and commodity prices, with all of them expected to come in at their highest levels in two to three years.
EURUSD – the 1.0720 area continues to frustrate while the 50 day MA at 1.0600 remains a key support. A fall through the 1.0600 area targets the 1.0460 area. A move through 1.0720 retargets the 1.0800 area.
GBPUSD – the 50 day MA at 1.2410 remains a key support despite last week’s brief round trip to 1.2350. A move above the high last week of 1.2580 retargets the 1.2700 area.
EURGBP – while we hold below the 0.8570/80 area the bias remains for a move towards the 0.8470 area, and potentially lower. If we move back above the 0.8580 area then the previous peaks at the 0.8650 area come back into play.
USDJPY – having found support at the 111.60 area last week the US dollar has rebounded, but it needs to get back through the 114.30 area to suggest a base is in. This remains a key resistance, and to stabilise we need to get back above here or run the risk of a deeper move towards 110.00.