The belief that central banks and governments can offset any economic downside from the virus with monetary and fiscal stimulus has continued to help drive asset prices higher, with Asia markets also rising this morning as China announced another reduction in its loan prime rate, in a move that wasn’t unexpected.    

In a sign that caution was still very much at the forefront of investor thinking we also had the sight of a higher US dollar, which moved up towards a three year high, and gold prices hitting their highest levels since 2013, as some haven buying also took place.

It is clear that while investors appear happy to continue buying stocks, they are hedging their exposure, and this is likely to continue as long as there is uncertainty as to how transitory the effects of any coronavirus ripple out effect is likely to be.

Investors are making a number of significant assumptions that governments and central banks will be able to mitigate the effects of any disruption in the short and medium term. Time will tell whether that is a safe assumption to make, however in the absence of anywhere else to put one’s money, the line of least resistance for now appears to be to buy stocks. This could quickly unravel if the coronavirus ripple out effects, prompt an inflation spike in the coming months.

Last nights Fed minutes showed that Fed officials, while confident about the US economy did have reservations about any future effects the coronavirus might have on, not only the US economy, but the global economy more broadly. With a slightly different make-up this year as four new rotating Fed Presidents came onto the voting cycle it was quite apparent that US policymakers aren’t in any rush to move on rates again for the foreseeable future.

There was a nod to recent events around the spread of the coronavirus citing it as a risk to the outlook, however there was little evidence that policymakers were concerned about it adversely affecting the US economy in the short term.

On the data front, US data once again pointed to a US economy that appears to be in fairly decent shape, while PPI prices, showed some evidence of rising inflationary pressure.

In the UK we saw a surprise jump in inflation to 1.8% in January, from 1.3% could well effect January retail sales numbers when they are released later this morning.

A sharp rise in transport and energy costs, as well as higher clothing costs helped put a floor under prices, and push CPI up to its highest level in six months. January CPI tends to be a little higher anyway given that rail fare increases usually artificially inflate the turn of the year number.

In December, retail sales in the UK dropped back sharply, falling 0.6%, as consumers held fire ahead of the general election on December 12th. There appeared to be a great deal more circumspection amongst UK consumers leading up to last Christmas after a year of negative Brexit and political news flow, prompted a more cautious end to 2019.

We expect to see a decent rebound in January as some of the shackles come off and consumers become more confident about the outlook domestically, with expectations of a rise of 0.7%, to start 2020 on a positive note.

A decent number here, along with some positive flash PMI’s tomorrow will in all likelihood put to bed any speculation that the Bank of England will be cutting rates any time soon, particularly since the March 11th budget still looks set to take place as scheduled. 

EURUSD– continues to slip back with gap support from April 2017 between 1.0730 and the 1.0780 area.  This gap level support needs to hold to prevent a slide towards 1.0340. We need to get above 1.0880 to stabilise and argue for a move back to 1.1000.

GBPUSD– has continued to come under pressure with the prospect of a retest of the 1.2870 area. A move below 1.2870 targets the 1.2780 level. If we hold above the 1.2870 area then we could see a rebound back to the 50-day MA as well as 1.3080 trend line resistance from the December highs at 1.3515 to target further gains.

EURGBP– currently holding above support at the 0.8280 area where we had the lows last December. This remains a key support level given it has found support here since 2017. We currently have resistance at the 0.8400 area.

USDJPY– yesterday’s move through 110.20 area opens up trend line resistance at 111.80 from the June 2015 peaks at 125.70. Support currently comes in at 110.20 break out area and below that at the 108.50 area.

Friday saw stock markets in Europe as well as the US finished lower, but they enjoyed a very bullish run in the four preceding sessions.  

China took action to stem fears in its domestic stock market by injecting liquidity into the markets, tightening rules selling, as well as announcing that levies on $75 billion worth of US imports will be cut. The result was that global stocks drove higher. Some equity benchmarks recouped much of the ground that was lost on account of the coronavirus situation, while the major US indices racked up record-highs. Dealers shrugged off the solid US jobs report as they seemed determined to reduce their exposure to stocks on the run up to the weekend.    

The report showed that 225,000 jobs were added last month, and keep in mind economists were expecting 160,000. The December reading of 145,000 was revised up to 147,000. Yearly average earnings came in at 3.1%, topping the 3% forecast. The previous earnings reading was revised higher to 3%, from 2.9%. The unemployment rate edged up to 3.6% from 3.5% - which was the only drawback of the update. It is worth noting the 3.5% unemployment rate was a fifty year low, so in the grand scheme of things the jobless rate is still very low.  

The jobs data helped the greenback push higher versus all the major currencies accept the yen – which is a safe haven move. The US labour market is in rude health, which gave traders the encouragement to buy into the greenback as the Fed seem very unlikely to be cutting rates anytime soon.

Overnight, China posted the latest CPI figures and the reading was 5.4%, while economists were expecting 4.9%. Keep in mind the previous reading was 4.5%. The PPI level was 0.1%, meeting forecasts, and the last reading was -0.5%. The low PPI reading suggests that demand at the factory level is weak. The Chinese government relaxed restrictions in relation travel, and some people started going back to work. Traders are still cautious about the situation. Stocks in China are a little lower.

The greenback might have been higher on Friday but that failed to stop gold’s advances. The metal usually has a negative correlation with the US dollar but it appeared the flight to quality desire of dealers took precedence. The commodity is comfortably above the mid-January lows so the bullish trend is still in effect.   

Oil tumbled on Friday on demand fears as well as the lack of unity from OPEC+ in relation to supply. Traders were fearful that China’s appetite for the energy will drop off as the health crisis is deepening. In addition to that, Russia are not keen on production cuts unlike the rest of OPEC+, so that division encouraged traders to dump oil. 

Italian industrial production will be released at 9am (UK time) and economists are expecting a 0.5% fall, while the November report was 0.1%. Last week there were dreadful industrial production reports from German and France as they showed a fall of 3.5% and 2.8% respectively. The industrial output isn’t the most influential update, but at the same time a very disappointing update will be remembered by traders. 

EUR/USD– has been pushing lower since late December and while it holds below the 50-day moving average at 1.1092, the bearish move might continue. Support might be found at the 1.0900 area. A break above 1.1172 should pave the way for 1.1249 to be retested.

GBP/USD– while it holds above the 1.2900 area the wider positive move should continue. A break above 1.3284 should pave the way for the 1.3500 area to be retested. A break below 1.2900 should pave the way for 1.2768 to be tested. 

EUR/GBP– surged on Monday but while it holds below the 0.8600 mark, the broader bearish trend is likely to continue. A drop below 0.8387 might bring 0.8276 into play. Resistance might be found at 0.8600. 

USD/JPY– has pushed higher and while it holds above the 50-day moving average at 109.25 the wider bullish trend should continue, and it might retest the 110.00 area. A move below 108.30 might put 107.65 on the radar.

The US Senate also passed the revised USMCA trade deal, giving President Trump his second win of the week, and which he is expected to sign into law next week.

While US markets have continued to get drawn ever higher, markets in Europe delivered a much more tepid response, finishing the day mixed yesterday, with the FTSE100 the worst performer.

Markets in Asia took up the US mantle with the latest economic data from China showing that the economy grew by 6% in Q4.

Industrial production for December also continued its recovery, building from the strong rebound to 6.2% seen in November, coming in at 6.9%, well above expectations, and the best level since last March.

Retail sales also held up coming in at 8%, sustaining the recovery seen in November, as the rebound in economic activity continued with the improvement in the data probably being helped by economic activity being brought forward ahead of the upcoming Chinese New Year holiday.

The new record highs in the US and positive Asia session are likely to see a positive follow through for markets here in Europe later this morning.

A part of the reason for the underperformance of markets in Europe is the weak nature of any recovery in the region, and some concern that President Trump may well turn his attention to Europe on the trade front. If the EU was looking to maintain a low profile in this area, they certainly have a funny way of showing it after EU trade commissioner Phil Hogan criticised US trade policy as short termism, and focussed only on winning the upcoming election. He went on to suggest that the EU might file a case at the WTO with respect to some of the terms of the deal.

While that may well be true, Mr Hogan is unlikely to win friends within the US administration for articulating it at a time when President Trump is taking aim at France’s plan for a digital tax and Airbus for illegal subsidies, and raising the prospect of tariffs on the European auto sector.

Mr Hogan also went on to take aim at UK Prime Minister Boris Johnson for his insistence that there would be no extension to this year’s transition period deadline, accusing him of brinksmanship.

After this week’s surprise drop in UK inflation to 1.3%, which prompted increasing speculation that the Bank of England might cut rates at the end of the month, attention is set to turn back to Europe today and the even more tepid inflation outlook that the European Central Bank is having to contend with.

In recent months we have seen some evidence of an uptick in EU CPI, however it still remains quite subdued on a historical basis, and with an ECB meeting next week, and yesterday’s minutes showing that there is limited appetite for further stimulus, new ECB President Christine Lagarde will have her work cut out to convince on the need for further easing measures.

Both the headline and core CPI measures for December are expected to be confirmed at 1.3%, welcome news given that both are at multi month highs, in contrast to the UK which is at a three-year low.

While speculation about a possible January rate cut served to push the pound to its lowest levels this month earlier this week, we’ve seen a bit of a rebound in the last three days, as currency traders mull the likelihood that the Bank of England will pull the trigger on a cut in two weeks’ time. The jury remains out on the wisdom of a rate cut at a time when questions are increasingly being asked about the efficacy of the current low rate climate.

Today’s December UK retail sales numbers could well tip the scales back away from that rate cut speculation if we see a strong recovery after the 0.6% decline seen in November. One of the characteristics of the recent November data has been how weak some of it has been, however given the political uncertainty ahead of the December election it is perhaps not  surprising that business and consumers held back. Expectations are for consumers to have unlocked the purse strings in the wake of last month’s landslide Conservative win and for there to be a rebound of 0.5%.

If we get a strong rebound then maybe some of the rate cut speculation of the last few days may well diminish.  

EURUSD – continues to edge higher, and could well close in on the resistance at 1.1220. We still have support at the 1.1100 area and the 50-day MA. A move below the 50-day MA could well open up a move towards the 1.1040 area.

GBPUSD– a third successive day of gains has seen the pound edge higher, as it looks to move towards 1.3120, as well as the 1.3220 level. Trend line support comes in at 1.3020 from the 1.2950 lows. A move through 1.2950 opens up the 1.2900 area.

EURGBP– having failed at the 0.8600 area the euro has slipped back. A move below the 0.8520 area has the potential to target the 0.8470 area. A move above 0.8600 targets the 0.8790 area.  

USDJPY– while above the 109.70 area the risk of further gains towards 110.70 remain on the table. Below 109.70 opens up support at 109.20 as well as last week’s lows at 107.65.

Amongst a number of downsides was the fact that the deal still means that tariffs still remain on $360bn of Chinese goods, and are likely to remain there for at least another 12 months, at the very least.

This because of a pledge by President Trump that the existing tariffs would remain in place until the second phase of a deal had been agreed. Given that it has taken nearly two years to pick off the low hanging fruit of a phase one deal, it does stand to reason that phase two is likely to take much longer. It also probably suits President Trump’s narrative to incorporate the prospect of a phase two deal into his re-election campaign.

In any case the tail risk for markets in the short term isn’t in the form of further de-escalation, but in the form of the deal falling down, and tariffs getting increased again. This does have to be set against the likelihood that President Trump would be prepared to risk a flare-up in the lead up to the presidential vote on November 3rd.

While US markets greeted the signing of the deal with fresh record highs for the Dow and S&P500, as various earnings reports continued to come in thick and fast, these gains proved to be difficult to sustain, as investors took profits heading into the close.

Markets elsewhere were also slightly more circumspect with European markets finishing the day mixed, and looking set to open similarly mixed when trading resumes later this morning.

Having spent most of the last few months worrying about China trade and geopolitical tensions in the Middle East, and in particular Iran, both now appear to have taken a slightly more benign turn.

Whether this current situation lasts is anybody’s guess, but for now markets can now focus more on earnings, as well as the prospects for the global economy.

The US consumer continues to look in fairy good shape, though yesterday’s disappointing earnings report from Target, could well be an early warning sign that the US economy might be on the turn. On the plus side management kept future guidance unchanged raising the prospect that the slow quarter may well have been a one off.

Today’s US retail sales numbers for December could well see a decent rebound after a lacklustre 0.1% gain in November, which appeared to show a more cautious US consumer over concerns that the US and China might well ratchet up their trade tensions further. Expectations are for a 0.5% gain in December retail sales as US retailers strive to hit their straps when it comes to their full year targets.

Weekly jobless claims are set to remain steady at 217k.

EURUSD– has managed to edge higher, above 1.1150 and could well close in on the resistance behind that at 1.1220. We still have support at the 1.1100 area and the 50-day MA. A move below the 50-day MA could well open up a move towards the 1.1040 area.

GBPUSD– has managed to hold above 1.2950 for now but needs to overcome the 1.3040 area to retarget the 1.3220 level. A move through 1.2950 opens up the 1.2900 area.

EURGBP– currently capped near the 0.8600 area. It needs to hold above the 0.8530/40 area to keep the upward momentum intact. A move above 0.8600 targets the 0.8790 area. Below 0.8530 retargets 0.8470. 

USDJPY – pulled back from the 110.20 area earlier this week, with resistance also at 110.70. The 109.70 area now becomes support for a move higher. Below 109.70 opens up support at 109.20 as well as last week’s lows at 107.65.

The White House has decided to keep tariffs on Chinese imports unchanged until the November Presidential election, allowing a timeframe to test China’s compliance on trade promises, a day from the scheduled signing of a phase-one trade deal in Washington. 

This move adds more uncertainty to the deal itself and puts more weight on China’s export and manufacturing sectors. US is currently imposing various levels of tariffs on US$ 360 billion of Chinese goods.

The offshore yuan CNH let go of earlier gains and retraced to 6.902 area against the greenback. USD/CNH pair is very sensitive to trade-related news and when it moves higher, it usually signals a deterioration in the US-China bilateral relationship.

Forex trading this morning also exhibited a risk-aversion pattern – JPY, EUR, CHF are gaining momentum, whereas AUD, NZD, NOK were among the lagging currencies in G10.

USD/JPY – momentum indicators DMI, MCD and RSI suggest that USD/JPY (4-hr chart) has been overbought and may face a technical pullback. Cautious sentiment surrounding the trade deal and a potential ‘sell on the trade fact’ scenario adds more pressure on the pair. Immediate support level can be found at 109.2 (38.2% Fibonacci Retracement) and then 1088.9 (50% retracement).

AUD/USD – the tariff news weighed on the Aussie dollar this morning, which is consolidating against the greenback at around 0.689 area. MACD and RSI point to a soft trading in its (4-hour chart) and a pullback from here could lead to a retracement towards the 0.685 area.

US equities came off from their recent highs, as profit-taking activities started to unwind some trade optimism. Asian markets are likely to follow a soft lead from overnight US trading and the actual signing of the phase-one trade deal will set the tone for the rest of the week.

The 145k new jobs was slightly below expectations and did mean that 2019 was the weakest year for jobs growth since 2011, however with the unemployment rate already at a 50-year low, that’s probably not surprising.

What was slightly more disappointing was that wages growth slowed to 2.9% from 3.1%, which in a supposedly tight labour market seems rather counterintuitive. This anomaly could well be explained by the fact that the main sectors seeing jobs growth are in the services sector, while manufacturing is in recession. Manufacturing jobs tend to be more highly salaried while the main areas adding jobs appear to be in the retail, leisure and hospitality sectors, where salaries tend to be lower.

Over the whole of 2019 the growth in manufacturing positions was over 200k below 2018 levels, and would also help explain why wages growth in December was the lowest since July 2018, as jobs in this sector fell back.

Against this sort of backdrop, it is hard to see the Federal Reserve doing anything other than a rate cut this year, assuming they cut at all, given the proximity of a US election in Q4.

Bond yields did slip back slightly, and while the US dollar softened a little the weakness was nothing particularly substantive, in a week where the greenback hit a two-week high.

The main focus this week, in the absence of any fresh Iran tension, is likely to be on this week’s meeting between the US and China in Washington DC, and the expected signing of a phase one trade deal on Wednesday, along with a host of economic reports including the start of US bank earnings season, at the end of the week.

These reports will be closely scrutinised for any signs of a slowdown in loan growth in all areas of the economy. In the previous quarter most US banks showed that the US consumer was in pretty good shape with lower rates helping to fuel decent loan demand, with JP Morgan Chase posting record revenues in its last quarter. The challenge now will be not only can it match its last quarter, but with a slightly weaker economy, will forward earnings expectations for US banks get pared back?

Crude oil prices had quite a week, going from a three-month high to a three-week low, in the space of three days. While Iran tensions look to have come off the boil from the hysteria of a week ago, there still remains the potential for further volatility in the days ahead, and with the Iranian government having to deal with unrest at home, due to its belated admission to the shooting down of the Ukrainian airliner, it wouldn’t be a surprise for the Tehran administration try and distract its population with some bashing of the US.

It’s also a big data week for the UK economy with the latest economic reports prompting some dovish mutterings from Bank of England officials about the prospect of further rate cuts. Gertjan Vlieghe became the latest MPC member to lean in that direction in comments made over the weekend.

As things stand MPC members Michael Saunders and Jonathan Haskell are already in the rate cut camp, voting for one in the last two meetings. With rates already close to record lows and global demand now starting to show signs of picking up, a 25bps rate cut is unlikely to make much difference, and in any case is already priced in by markets so would in all probability make no difference at all.

Today’s latest manufacturing and industrial production for November is expected to come in on the weak side in any case, with declines of 0.2% expected in both.

This should not be a surprise given the huge political uncertainty at the end of last year which saw businesses across the country delay important business decisions, due to the election in December.

Against this sort of backdrop, policymakers would do well to adopt a bit of common sense, and wait until the December and January numbers are out, given that last month’s Conservative party election win could well prompt a significant rebound in investment and economic activity in the weeks ahead.

Over the past few years central bankers have been way too keen to cut rates and add stimulus, and far too cautious when it comes to raising rates and withdrawing support from the economy, with the Bank of England particularly guilty in that regard over the past 8 years.

EURUSD– fell back towards the 1.1100 area last week, with the 50-day MA acting as support. A move below the 50-day MA could well open up a move towards the 1.1040 area. Currently in a minor uptrend from the October lows but needs to take out the 1.1250 area to signal further gains towards 1.1400.

GBPUSD– came under pressure last week slipping towards the 50-day MA at 1.3010, a level which has so far currently held. A break below 1.3000 opens up the 1.2920 area. We need to move above 1.3220 to target 1.3500

EURGBP – tried and failed to move back above the 50-day MA last week at 0.8540, after finding support at the 0.8450/70 area. A sustained move back above 0.8540 targets the 0.8600 area. 

USDJPY– finding resistance at the 109.70 area and trend line resistance from the 2018 highs at 114.55. A break of this level has the potential to crack open the 110.70 area. Support comes in at last week’s lows at 107.65.

While that seems a big assumption to make it would need a significant escalation now for the current rebound to come full circle, and while it would be unwise to rule that out, investors have been rotating into gold as a precaution, in addition to buying back into stocks, just in case.

It’s also been another week of records with new record highs for the S&P500, Nasdaq and Dow, a state of affairs that didn’t look likely when markets opened for trading at the start of trading this week, and while markets in Europe have lagged behind they are also closing in on their previous record peaks.

With this week’s geopolitical risk subsiding as we head towards the weekend, investors now have the opportunity to focus on the signing of the signing of the new US, China phase one trade deal next week, as well as the health of the US economy today, and in particular the labour market which has continued to look resilient.

There has been a lot of talk this week that the Federal Reserve might well remain on hold this year as far as rates are concerned. This year could well be problematic politically for the Fed if it doesn’t feel the need to cut rates in the first half of this year, given it is an election year, and could be used as a political punchbag if the economy were to start to slow as we head towards November. For now the US economy appears to be holding up well, bar the manufacturing sector which is in recession, while the services sector is still growing solidly, while the jobs market appears to be performing well.

Wednesday’s ADP employment report for December showed a decent rebound after an initially weak November reading, and while that was subsequently revised up to 124k it was still significantly weaker than the more closely monitored non-farm payrolls report, which showed a big jump to 266k in November.

This shouldn’t have been a surprise given that November tends to be a strong month due to seasonal factors in the lead up to Thanksgiving, as stores hire more part time and temporary staff for the holiday season.

In today’s December US employment report, we can expect to see a softening to 162k, however given the strength seen in the employment component of this week’s ISM non-manufacturing report, there is a chance that this estimate may well be on the low side. We should also look for any possible downward revisions to the November number, which was surprisingly stronger than expected.

Wage growth will also be closely scrutinised for any signs of weakness. This is expected to come in at 3.1%, while the unemployment rate is expected to remain steady at 3.5%.

If these numbers come in broadly as expected they should be broadly US dollar positive, and reinforce investor perceptions that the US economy still remains some way from slowing down.

The pound came under pressure yesterday after Bank of England governor Mark Carney suggested that the central bank might have to do more stimulus if the much-anticipated Brexit bounce turned out to be weaker than expected.

He indicated that the Bank of England had sufficient headroom to double its 2016 stimulus package of £60bn, which could deliver 100bps of that, while cuts to the base rate, currently at 0.75%, and forward guidance would deliver the rest.

This seems somewhat premature at a time when the debate at the moment is whether the current low rate environment is actually doing more harm than good. Furthermore, given how much damage the Bank of England’s last stimulus intervention did to consumers real earnings you would have thought that officials might want to be more circumspect about their policy musings. Nonetheless given that he only has one more meeting to oversee, he may well merely have been releasing a trial balloon.

In August 2016 the Bank of England’s stimulus measures helped push headline CPI up from 0.6% to over 3% in the space of 12 months, a policy move that ultimately turned out to be premature, as well as unnecessary.

EURUSD– has also come under pressure this week with the 1.1100 area and 50-day MA acting as support. A move below the 50-day MA could well open up a move towards the 1.1040 area. Currently in a minor uptrend from the October lows but needs to take out the 1.1250 area to signal further gains towards 1.1400.

GBPUSD– has come under pressure this week slipping towards the 50-day MA at 1.3010 which has so far currently held. A break below 1.3000 opens up the 1.2920 area. We need to move above 1.3220 to target 1.3500.

EURGBP– support currently appears to be holding at the 0.8450/70 area, and while above here the risk is for a move back to the highs last month and 0.8600 resistance. We also have resistance at the 50-day MA at 0.8540. 

USDJPY– currently finding it difficult to crack the 109.70 area trend line resistance from the 2018 highs at 114.55. A break of this level has the potential to crack open the 110.70 area. Support comes in at this week’s lows at 107.65.

It is quite clear that investors are still nervous that the various chess games being played out in the shadows could cause one side or the other to overplay their hand, however it is clear that neither side wants to go down the route of an outright break out of hostilities.

Markets initially sank quite sharply Wednesday morning on the announcement of Iranian missile strikes on Iraqi air bases, reflecting this continued anxiety, however they recovered some of their poise after it became apparent that they were a ladder to allow both sides to pause and reflect on recent events, without losing face domestically.

On Iran’s part, the supreme leader Ali Khamenei called the strikes a “crushing response” on state TV, while internationally it soon became apparent that Iranian forces had forewarned Iraqi forces that the missiles were coming their way, allowing time for their personnel, along with US personnel to get clear.

As a result, gold and oil prices quickly slipped back after spiking higher initially, with crude oil prices sinking back to levels last seen before Christmas.

This sharp change in sentiment was also down in part to comments from US President Trump, who while adopting a tough tone towards Iran, also played along by saying that he felt Iran was ready to take a step back, and as such there was no need for further military action on the part of the US.

This dialling down of tensions in turn helped push European markets finish the day higher, as well as helping to push, both the S&P500 and the Nasdaq to new record highs.

The new record highs and strong finish for markets in the US yesterday look set to see markets here in Europe pick up where they left off and open higher this morning, carrying over the relief rebound from last nights close.

On the data front manufacturing in Europe has continued to struggle after German factory orders in November fell by 1.3%. this weakness only serves to reinforce the narrative of a struggling manufacturing sector being offset by improvements in services, something that could well be reaffirmed by today’s industrial production numbers for the same month.

On the trade front German exports are expected to decline 0.9% highlighting the weak state of the global economy, as trade concerns weigh on economic activity. Imports are expected to rise slightly by 0.1%.

In the US, doubts about the US labour market still appear wide of the mark after a bumper ADP payrolls report of 202k for December, which saw a strong rebound from a weak 67k number in November, though this was also revised up to 124k.

It also underscores why Federal Reserve officials appear so confident about their forecasts for interest rates in the wake of last week’s FOMC minutes. They also bode well for consumer confidence and consumer spending ahead of Friday’s payrolls report, which is also expected to do well, though probably not as strong as November’s 266k.

EURUSD– the euro has continued to struggle slipping further away from its recent peaks above 1.1200, with a break below 1.1100 potentially opening up a move back towards the 1.1040 area. Currently in a minor uptrend from the October lows but needs to take out the 1.1250 area to signal further gains towards 1.1400.

GBPUSD– still in the uptrend from the lows in September, despite failing to push above 1.3220 yesterday. The fall from the 1.3500 highs last month found support at the 1.2920 area, and would need a break of this and 50-day MA to signal further declines. We need to move above 1.3220 to target 1.3500.

EURGBP– support currently appears to be holding at the 0.8450/70 area, and while above here the risk is for a move back to the highs last month and 0.8600 resistance. Above 0.8600 targets the 0.8800 area. 

USDJPY– yesterday’s fall to 107.65 was quickly reversed with the risk that we could well retrun back to the 109.20/30 area. This appears to be the range for the time being with a break either side determining the next move here.

Asian equity markets are likely to follow US futures lower, as investors flee away from risk assets into safe havens.

The abrupt re-escalation of geopolitical tensions led to the gold price surging to a seven-year high of $1,605, as fears of uncertainty boosted demand for safety. Technically, however, it seems that gold has been severely overbought and may be subject to a pullback if sentiment recovers on positive developments. Right now, all traders are eyeing the White House’s response to Iran’s attack on US bases in Iraq and President Trump’s decision will be key to financial markets.

Similarly, safe-haven currencies JPY and CHF rallied against the USD, showing a clear sign of ‘risk off’. In contrast, AUD, NZD, SEK were among the worst performing G10 currencies.

The Brent crude oil price, a key commodity sitting in the centre of the Middle East tensions, opened 4.2% higher this morning to $72.1. As mentioned before, US-Iran tensions put the safety of the Strait of Hormuz at high risk. Situated between Iran and Oman, the Straits of Hormuz is a strategically important crude oil gateway that links Middle East crude oil production to the rest of the world.

Besides geopolitical turmoil, macro data continued to deliver positive results that show economic expansion. The US non-manufacturing PMI Index climbed to its four-month high of 50.0. The reading was higher than November’s number of 53.9 and beat market expectations of 54.5. It suggests that businesses felt relieved by a partial trade deal between the US and China, and service sentiment continued to improve. The US dollar index climbed higher to 96.5.

In Asia, trading sentiment might be dampened by the headline news, which looks far more severe than the fundamental impact. Thus, this round of selloff may create bargain hunting opportunities in the regions and markets that have little business to do with Iran and Iraq. Such markets includes China, HK and Singapore.

Sector wise, crude oil, gold and national defence-related industries may get a temporary boost in their share prices. Rising crude oil price may lead to a fall in the currency of countries which rely heavily on oil imports, such as China, India and South Korea.

The lack of any haven buying in US treasuries suggested that while investors were a little spooked by the rising tensions in the Middle East, as seen by the sharp rise in the gold price, the inability of both oil prices and gold prices to consolidate their new peaks encouraged investors to start buying back into stocks.

Putting to one side the heat and noise of the events of the last few days, and in the absence of further violence and escalations the reality is that very little has changed. We already know that Iran and the US don’t like each other very much, and this is unlikely to improve any time soon, with the rhetoric likely to remain heightened. As such unless an all-out shooting war breaks out, any likely next steps are unlikely to be anything that isn’t already priced in, with oil prices only modestly higher, and now slipping back again in Asia.

While one can argue that the US miscalculated the strength of reaction to its removal of Soleimani from the battlefield, it can also be argued that Iran pushed its luck once too often in testing the limits of US patience when it came to Iranian interference in various proxy wars, and the targeting of US interests.

As far as today is concerned and the reaction of Asia markets to the US turnaround, we can now expect to see European markets open higher this morning.

In comments made over the weekend ex ECB President Mario Draghi expressed concern that the Euro area was at risk of Japanification when it comes the outlook for inflation and interest rates. He urged EU policymakers to use any fiscal levers at their disposal to help the ailing economy.

His warnings would appear to suggest that he believes the ECB is at the end of the road when it comes to adopting further measures to help the Eurozone economy, particularly since another central bank, which was a trailblazer for negative rates has already thrown in the towel on the practice.

The Swedish Riksbank last month moved its headline rate back to zero prompting criticism in some areas for unnecessarily tightening policy at a time of economic weakness and low inflation. Far from being criticised the Riksbank should be commended for acknowledging that the negative interest rate policy has been a failure, and recognising that the medicine may well have been killing the patient.

Against this back drop it is perhaps welcome that we are starting to see some signs of a recovery in economic activity with yesterday’s services PMI’s showing a decent rebound at the end of last year. Along with the rebound in oil prices which are higher than they were a year ago there are some signs that inflationary pressures are starting to reassert themselves.

Today’s preliminary EU CPI numbers for December are expected to reflect that headline prices expected to edge up from 1% in November to 1.3%. Core prices are expected to be unchanged at 1.3%.

The US economy is also expected to remain in focus after last week’s disappointing ISM manufacturing report, prompted further concerns about a ripple out effect into the rest of the country. This fear seems overstated given how manufacturing and services activity diverged in Europe for nearly all of last year. 

Today’s ISM non-manufacturing numbers for December are expected to be as similarly resilient as yesterday’s Markit PMI numbers which came in at 52.8, with expectations of an improvement in the ISM measure to 54.5, which in turn is likely to be an important arbiter for Friday’s US payrolls report.

EURUSD– finding support above the 200-day MA at 1.1130 the bias has shifted towards further gains towards the highs last week at 1.1240. Currently in a minor uptrend from the October lows but needs to take out the 1.1250 area to signal further gains towards 1.1400. If we fall below 1.1100 then we could drift back towards the 1.1040 area.

GBPUSD – still in the uptrend from the lows in September. The fall from the 1.3500 highs last month found support at the 1.2920 area, and would need a break of this and 50-day MA to signal further declines. A move back above 1.3220 signals a return to the December highs.

EURGBP– the rally from the 0.8275 lows last month is currently finding resistance at the 0.8600 area. For now, we have support between the 0.8450 and 0.8470 area, and while above this level the risk is for further gains towards the December peaks.

USDJPY– currently have some support at the 107.70/80 area, a break of which could see a fall to the 106.80 level. While support just below 108.00 holds the risk is for a return to the 109.20/30 area.