European markets closed the day lower yesterday as caution crept in after what has been a strong start to the year.

This week’s US CPI report is now the next focus for markets in the tug of war currently playing out between the market, which thinks the Fed will have to cut rates this year, and Fed officials who insist nothing even close to that will happen.

Fed chair Jay Powell’s comments yesterday did little to indicate whether the FOMC was inclined to take another step down in its rate hiking cycle when it next meets at the end of the month.

This means that the comments earlier this week from San Francisco Fed President Mary Daly and Raphael Bostic of the Atlanta Fed have continued to temper market reaction after last week’s ISM services and US jobs report, prompted speculation that we might see a pivot.

Nonetheless the lack of hawkish comment from chair Powell yesterday gave US markets the perfect reason to stop trending lower as we saw a modest rebound into the close, led by the Nasdaq, although rather perversely bond yields also edged higher.

This rebound after Europe had closed looks set to see European markets open modestly higher this morning, on a day with little in the way of economic data drivers.

The market fixation that the Fed might pivot is understandable in some respects when you consider the dire predictions of the likes of the IMF last week, and yesterday by the World Bank, which said the global economy was on a razors edge, and at risk of sliding into a prolonged recession.

While these are valid concerns, they don’t form part of the Fed’s mandate, which is low unemployment and inflation. It is meeting one of those criteria and not the other, which means further rate hikes are inevitable given that core CPI is 3 times higher than the Fed’s 2% target.         

EUR/USD – the June highs at 1.0787 remain the key barrier when it comes to further gains, after last week’s reversal off 3-week lows at 1.0480/85.  A move through 1.0800 has the potential to open a move towards 1. 0920.

GBP/USD – has slipped back from the 1.2200 area, after last week’s rebound from 6-week lows at 1.1830/35.  The next big resistance lies at the 1.2350 area. We need to hold above the 1.2000 area for further gains to unfold.

EUR/GBP – range trading between support at the 0.8770/80 area this week, and resistance at last month’s highs at the 0.8870/80 area which has contained rallies since October last year. A move below 0.8770 opens up a move back to the 50-day SMA at 0.8700.

USD/JPY – while below the highs of last week at 134.80 the bias remains for a return to the recent lows at 129.50, where we saw the US dollar bounce from a 6-month low. Above 135.00 targets a move towards 138.00.

FTSE100 is expected to open 26 points higher at 7,720

DAX is expected to open 83 points higher at 14,857

CAC40 is expected to open 31 points higher at 6,900