Europe to open higher after positive US close

It seems that for now optimism is outweighing pessimism as US equity markets closed at fresh 5 year highs last night despite concerns about looming sequestration in the US on the 1st March.

Positive economic data yesterday combined with a fairly dovish Fed Chairman continues to keep a floor under stocks despite the continued uncertainty coming out of Europe.

As such European markets look set to open higher this morning putting us pretty much back where we were at the beginning of the week, before the meltdown on Tuesday over fears of political deadlock due to the inconclusive Italian election.

In fact nothing has been settled in Italy, though the relative success of a 5 and 10 year bond auction, albeit at higher yields, has settled investors down.

Even so the political situation appears as far away from a satisfactory resolution as it was earlier this week, yet markets appear to have recovered their composure, while at the same time ignoring the likelihood that, in Europe at least, the economic data seems likely to continue to deteriorate.

It does make you wonder how bad things need to get before market performance starts to reflect the economic data.

Germany is likely to continue to remain the outlier in Europe with the release of the latest unemployment figures for February which are expected to remain unchanged at 6.8%, which is likely to be as good as it gets for Europe with the Italian and European figures due out tomorrow.

January inflation figures are also expected to remain below the ECB target of 2%, with German CPI at 1.7%, the broader European CPI measure confirmed at 2%

Yesterday Spain announced that its budget deficit for 2012 was 6.7%, still outside the EU’s target of 6.3% but still better than expected. The cost of this in terms of GDP contraction in Q4 is expected to be confirmed later today as -0.7%.

This week’s economic data from the US has shown that the economic recovery appears to be continuing slowly and today’s latest Q4 GDP revision is expected to show that the economy did not contract by 0.1%, but in fact grew by 0.5%.

Weekly jobless claims are set to come in around 362k, pretty much the same as last week.

EURUSD – the euro has found a degree of support just above the low this year at 1.3000; and the current bounce has taken it back above 1.3125 and the 100 day MA. We also have resistance at 1.3160. The H&S objective at 1.2900 remains intact while below the neckline at 1.3325. Longer term support lies at 1.2825 and the 200 day MA.

GBPUSD – while above the lows at 1.5070 the risk of a rebound remains but we need to break through the 1.5270 area to stabilise for a broader rebound towards 1.5400.
A break of 1.5070 argues for a longer term move towards 1.4950, which is the July 2010 low.

EURGBP – the euro continues to find support at the 0.8580 area and the 15th February low. Only a move below 0.8580 has the potential for further weakness towards 0.8460. Having seen a key reversal day on Monday the risk is for a move lower while below 0.8680.

USDJPY –the key support remains towards the 90.30 area and it is this area which the US dollar needs to stay above to keep upside intact. The move above the 92.40 area should now see a move towards the 93.20 area, and then the 94.00 level once again.