European markets traded sharply lower yesterday as the early year optimism ran into a little bit of turbulence, as well as some profit taking, with the DAX and FTSE100 both slipping to one-week lows.

US markets also followed suit, falling for the second day in a row even as weekly jobless claims fell to a four-month low of 190k, and a couple of Fed voting members said that a further step down in the central banks rate hiking cycle to 25bps would be justified.

This would suggest that there is a growing caucus on the committee for a slowdown even as recession risks rise.

Anyone thinking that Fed governor Lael Brainard would add to this slightly softer chorus of a step down would have been disappointed as she argued that rates still needed to rise, and more importantly would need to stay higher for some time, and that the central bank needed to stay the course.

As we look ahead to today’s European open, we look set for a modest rebound after the steep losses of yesterday, however it's hard to see how we won’t give back some of this year’s gains, after surging out of the blocks in the first two weeks of this year.

This time last week there was widespread surprise after UK monthly GDP in November surprised to the upside, building on the rebound seen in October, as economic activity slowed to 0.1%, down from 0.5%.

While manufacturing and industrial production was disappointing the services sector got a boost from the football World Cup as pubs and bars reported a pickup in footfall. Tour operators and reservation services were also positive contributors with gains of 3.7% as people booked holidays for next year.

This better-than-expected performance along with a raft of positive pre-Christmas trading updates from high street retailers has prompted optimism that the UK could avoid a recession when it reports its Q4 GDP numbers in a few weeks’ time.

Today’s December retail sales numbers could add to that less negative mood around the UK after the decline of -0.4% we saw in November, which reversed some of the 0.9% gain seen in October. Taking into account the World Cup, which started on 20th November, and England’s participation until they were knocked out on December 10th, as well as the lead-up to Christmas, could see a decent rebound in consumer spending.
Forecasts are for a 0.5% gain, which could well help the economy bounce back after the contraction seen in Q3.

We could also get further evidence of how inflationary pressure in Europe is subsiding, and specifically in Germany with the latest PPI numbers for December, which are expected to show another steep fall on the month by -1.2%, taking the annual number down from 28.2% to 20.9%. While still an eye-wateringly high number let’s not forget that in September we were at 45.8%, so we’ve seen a sharp drop already.  

EUR/USD – continues to chop between resistance just below 1.0900 and support around the 1.0770/80 area. Could see a deeper fall towards 1.0720. The key resistance sits at 1.0950 which is a 50% retracement of the move from the 2021 highs to last year’s lows at 0.9536. A move through 1.0950 opens up a move towards 1.1110.

GBP/USD – ran out of steam just shy of the December peaks at 1.2440, earlier this week, but held above the 1.2300 area yesterday. Above 1.2450 could see a move towards 1.2600. We need to hold above the 1.2000 area for further gains to unfold or risk a return to 1.1830.

EUR/GBP – dropped to support at 0.8720 yesterday, before squeezing back to the 0.8770/80 area. This week’s drop from 3-month highs at 0.8895 puts the onus on a move towards the 50- and 100-day SMA. The next support below 0.8720 targets 0.8680.

USD/JPY – the failure to hold onto the gains above 130.00 earlier this week keeps the prospect of further weakness and a move towards the 126.50 area which is the 50% retracement of the up move from 101.18 to the highs at 151.95. Below 126.50 targets the 120.60 area.

FTSE100 is expected to open 38 points higher at 7,785

DAX is expected to open 90 points higher at 15,010

CAC40 is expected to open 50 points higher at 7,003