Europe’s markets set to make a cautious start

European equity markets look set to continue their slow glacial push to multi month highs this morning as investors become more encouraged that the recent improvements in economic data, particularly out of Germany could well herald a change in fortunes for the beleaguered European economy.

A slight improvement in German consumer confidence to 5.8 from recent multi month lows suggests that the normally cautious German consumer could be starting to become more optimistic.

Even so another general strike in Greece is a timely reminder that for all the recent calm, problems in that country remain as difficult as ever, while Europe’s other problem child Spain was offered some encouragement yesterday by comments from Olli Rehn when he suggested that Spain could be granted some leeway on its budget in the event the growth outlook continued to deteriorate.

Despite these gains there continues to remain a lack of conviction about the sustainability of the current rebound, no doubt reflected by last night’s rebound in the VIX, though that could really just be about market caution ahead of some key US economic events later this week.

This caution looks set to be reflected in the latest US consumer confidence numbers for January which are expected to show a small decline from 65.1 to 64.00, which begs the question as to how resilient this rally could turn out to be.

We also have the latest FOMC rate decision tomorrow, along with US Q4 GDP along with the latest private payrolls ADP report, which is expected to show a fall from 215k to 163k jobs added in December.

The key note number remains the main employment report on Friday, with the latest declines in weekly jobless claims building expectations of a good number.

EURUSD – the 1.3485 level along with the 200 week MA now become the next key obstacles to further gains. Above 1.3500 targets 1.3835, the 61.8% retracement level of the same move. Pullbacks should find support at 1.3400, while below that we have the 1.3250 level the January lows. The long term support line from the 1.2045 lows now comes in at 1.3070 which remains the key level on the downside. .

GBPUSD – the pound continues to come under pressure testing 1.5680 the 61.8% retracement of the 1.5270/1.6380 up move. There is also long term trend line support at 1.5630 from the 2009 lows at 1.3500, a break of which opens up the 2 year range lows at 1.5270. The 200 day MA at 1.5910 should now act as resistance.

EURGBP – the pound continues to lose ground pushing beyond the 200 week MA finding resistance at 0.8576, 61.8% retracement level of the down move from 0.9085 to the lows at 0.7755. We also have resistance at 0.8605 trend line resistance from the 0.9805 highs. Having acted as a top for so long the 0.8425 level should now act as support on any pullbacks. Long term trend line support at 0.8115 comes in from the 0.7755 lows.

USDJPY – another new high last week at 91.20 brings the US dollar close to the 94.00 level. We continue to remain extremely overbought which makes the US dollar susceptible to sharp pullback. Key support remains all the way back at the 87.50 level.