Europe Points to Weaker Open After Wall Street Reversal on Shutdown Fears

Despite the Dow breaking through 26,000 soon after the market opened on Tuesday, it also notched up its biggest one-day decline since February 2016. The S&P and the Nasdaq also touched fresh record highs, before ending the overnight session lower.

The 283 point sell off came as concerns over a government shutdown overshadowed strong Q4 earnings. The Dow ended 10 points lower at 25,7092, the S&P closed 0.4% lower at 2776, whilst the Nasdaq knocked off of 0.5% to 7223. European futures are pointing to a softer start, taking the lead from the US.

US Shutdown Fears Rise

Government shutdown is once again an issue. Congress needs to pass a spending bill by Friday at the latest, in order to avoid a shutdown of the US government. However, an immigration bill which the Democrats also want to pass, is proving to be a point of contention and is complicating the efforts to keep the government open.

The volatility index, also referred to as fear index as it considered the best gauge of fear in the markets, jumped by 14.5% to hit a 2-month high of 11.63. The pop higher of the VIX combined with the steep reversal in the US equity indices, suggests that investors are starting to fret as to whether Congress will make the deadline.

The political concerns on Capitol Hill were also impacting on the dollar, which has had woeful start to the year. The dollar extended losses in the Asian session, with the dollar index moving into its sixth consecutive losing session on Wednesday, hitting a fresh 3 year low of 90.14.

Cable recovers CPI losses

As for GBP/USD, the pound managed to dig itself out of a hole created by slowing UK inflation data. After UK CPI ticked down slightly to 3% versus 3.1% in November, sterling declined, picking up in the US session to close above 10 sma at $1.3785.

Eurozone CPI data in focus

Inflation remains a key theme for Europe on Wednesday as CPI data for the eurozone is due to be released at 10am GMT. Inflation is expected to have slowed in December to 1.4%, from 1.5% in November. Whilst core inflation is expected to remain steady at 0.9%.

The European Central Bank are all to aware of the challenges they are facing to keep prices rising in the eurozone, whilst winding down the current bond buying programme. Complicating the matter further, rising oil prices will no doubt feed into euro-area inflation, whilst the stronger euro could at the same time dampen price rises.

With strong contrasting inflationary / deflationary pressures investors will be watching the release carefully. Should inflation show signs of increasing, investors could rush to the conclusion that this will help embolden ECB policy members to end the bond buying programme in September. Under these circumstances the euro could move higher.

EUR/USD hit 3 year high

The euro gained 0.4% versus the dollar in the previous session, hitting a fresh 3 year high of $1.2323, before easing back below $1.23. A meaningful move above $1.2323 could open the doors to $1.2377 before $1.24. On the downside, a break below $1.2254 (the previous session low) could lead to  a decline to $1.22.