European stocks retain positive edge, king dollar reigns

European stocks bounced well on Monday and the positive momentum continued into Tuesday. US stocks were a mixed bag though as investors espied trade talks with China this week. I would stick to the thesis that US markets will likely be edging in a sideways direction before resolution of those talks, whilst remaining susceptible to news flow around those discussions on both the upside and downside.

SPX was flat a little above 2,700, while the Dow edged 0.21% lower. But futures are pointing higher this morning as optimism takes hold. This seems to be on news that the GOP and Democrats have ‘agreed in principle’ a funding bill that should avert another government shutdown.

The FTSE 100 continued its ascent having pushed up again on Monday, extending its breakout to 7,129.11 by the close. At send time it had opened up at 7,155. Look for a break north to last week’s peak a little below 7,200, with resistance at 7,222, the 50% retracement of the downward thrust since last May’s peak to the Dec low, which coincides with last Sep swing low. Having broken out of the recent downtrend, rising trend support now arriving around 6900.

In focus today – Theresa May will push for more time on Brexit. So we expect a vote not taking place until the end of Feb. Sterling could well be susceptible to any commentary from MPs and the PM today.

Sticking to the forex markets, king dollar is once again reigning supreme having had to deal with some attempts to dethrone it. The dollar index has rallied for 8 straight days to notch up its best gain in 2 years. A test at 97 is coming.

GBPUSD has eased back again, once again testing last week’s lows at 1.2850. Should this level go it could open up a return to 1.27. Sentiment remains against the pound – May can buy time but it amounts to little more than a stay of execution.

EURUSD is also finding the going tough as the dollar remains well bid.. Having broken down through support at 1.12885, the Jan low, the next leg of support comes in around 1.12475, before 1.12145, last November’s multi-year low and a key level of support. If that goes then we would assume further EUR weakness, although there would be a real tussle between 1.11 and 1.12 before we know the final direction.

USD remains the best bet this year given the disparity in growth rates and monetary policy divergence and the market is finally coming round to this. The roll-off in European data in particular necessitates a looser stance by the ECB, not tighter and this could well push EURUSD back to 1.05 by the summer.

Oil was firmer as Brent held the $61.50 level and markets look ahead to the monthly OPEC report. US-China trade tariffs and worries about global growth dominate the demand side, while supply is coming on fast in the US and this could cap the upside.”