In what has been a choppy start to the year for European markets, we’ve seen the FTSE 100 fall for three weeks in a row, while the rest of Europe has had a predominantly negative bias, with the Stoxx 600 down by 2%. This negativity has come against a backdrop of central bankers pushing back on market expectations of early rate cuts, as investors recalibrate the timings of when to expect a change of policy and the start of a possible rate-cut cycle.
While European stocks have struggled because of this pushback, US markets have merely shrugged, with the S&P 500 becoming the latest US market to take out its 2022 highs to close at a fresh record high last week. Having rallied into the end of last year, markets in the US have picked where they left off, with new record highs for all three major indices, led by the Nasdaq 100 which is up by 2.9% year to date, due to further gains from the 'magnificent seven', led by Nvidia which is up 20% since the start of the year, along with Advanced Micro Devices, which has added 18%.
Friday’s record finish in the US looks set to see markets in Europe open higher this morning, despite Asia markets getting off to a mixed start as the Nikkei 225 sets fresh 34-year highs, while Chinese markets can’t seem to buy a bid, after Chinese loan rates were kept unchanged.
The current divergence between US and European markets is probably down to the belief that the US economy is in much better shape than its European counterparts, a belief that is likely to be reinforced further this week by the latest US Q4 GDP numbers, ahead of next week’s Fed meeting. Before we get to that however, last week’s pushback from European Central Bank policymakers on an imminent rate cut makes this week’s meeting of the governing council and its policy decision that much more important, in terms of signalling its intentions about the possible timing of a rate cut, which some in the market think is due.
With a lot of the European economy struggling with weak demand, as well as an economy that has seen precious little growth since Q3 of 2022, the calls for the ECB to consider a modest easing of policy have been growing louder. This market pricing prompted the likes of the Bundesbank’s Joachim Nagel, Austria’s Robert Holzmann and ECB president Christine Lagarde to all push back on the idea of an early rate cut last week, although Lagarde did hold open the possibility of a summer rate cut as she looked to keep the doves onside.
This week the ECB could outline its thinking on how it sees the economy evolving, as well as the possible timeline for when we can hope to see some policy change. Markets currently have the ECB cutting rates four times this year in increments of 25bps, starting in June, although this could come earlier if the economic data deteriorates further.
We also get to hear from the Bank of Japan this week, with the Japanese yen being the worst performer this year, as well as last week, due to expectations of a change in policy being dialled back due to an easing of price pressures, after a sharp slowdown in cash earnings in November.
EUR/USD – found support at the 200-day SMA at 1.0840 last week. A break below here and the 1.0800 level targets the 1.0720 area. The main resistance remains at 1.1000.
GBP/USD – continues to find support just above the 50-day SMA and 1.2590 area, which is keeping the upside potential intact. We need to get above 1.2800 to maintain upside momentum. Also have support at the 200-day SMA at 1.2550.
EUR/GBP – has found support at the 0.8550 level over the last 2-months. A fall through here could see further falls towards the 0.8520 area. We still have resistance at the 0.8620/25 area and the highs last week.
USD/JPY – continues to edge towards the 150.00 level. Pullbacks likely to find support at the 146.25 level cloud support as well as the 50-day SMA.
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