Financial market research and analysis

Upbeat start to event packed week

European markets look set to start the new and event-packed week on a positive note. The move higher comes following a generally upbeat session in Asia overnight and a strong end to the previous week on Wall Street, which saw the Dow Jones rally 344 points, whilst the S&P rallied 1.6% and the Nasdaq jump 1.7%.

Whilst this new week starts off slowly, with little in the way of high impacting economic data to catch investor’s eye; things certainly pick up as the week progresses, with US inflation data and the first testimony by the new US Federal Reserve Chair Jerome Powell headlining.

Jerome Powell to stick to the script

The mood in the markets had improved by the end of last week, with expectations that the Fed will keep rate hikes gradual, pulling treasury yields and the dollar lower. No surprises are expected from Jerome Powell as he appears before the House on Tuesday. The fact that treasury yields have eased off is proof itself that the markets aren’t expecting Powell to rock the boat, particularly in light of the risk aversion that we saw at the beginning of the month.

PCE in focus

The key risk event for the US this week will be the Personal Consumption Expenditure print on Wednesday. This is the Fed’s preferred measure of inflation and given the market’s hypersensitivity to inflation and the interest rate outlook, could provoke a volatile reaction. Similarly, to the unexpected strength in wage growth at the beginning of the month, a strong core inflation reading could push yields and the dollar higher once more, whilst global equities could continue their recent sell off.

GBP/USD back over $1.40

GBP/USD has kicked the week off on the front foot crossing the key psychological level of $1.40. Sterling is finding support from the broadly weaker dollar and hawkish comments made over the weekend by the Deputy Bank of England Governor, Dave Ramsden. Only back in November Ramsden was one of the two BoE policy makers who voted to not hike rates. Now, just three months later and with inflation remaining elevated at 3%, Ramsden appears to have shifted his stance in favour of hiking, possibly as soon as May.

Brexit makes a return to the forefront of traders’ minds this week. Last week’s Brexit negotiations resulted in fewer negative headlines than during previous stages of the talks. Meanwhile, the Brexit cabinet put on a rare showing of unity, apparently putting their difference behind them, at least for the time being. We will now wait to see what Theresa May has to offer in her much anticipated “road to Brexit” speech on Friday.

Continued hawkish BoE commentary, in addition to a preference of a Brexit, which keeps the UK closely aligned to the EU could see GBP/USD target $1.4020 in the near term before moving higher to $1.4060 before $1.4100.

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