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European markets were somewhat of a mixed bag yesterday after the lates flash PMI numbers painted a patchy outlook for certain parts of the economy in the UK and Europe.

US markets also underwent a mixed finish with the Dow finishing higher and the Nasdaq 100 lower,  due to caution ahead of the release of key earnings announcements after the close last night, with the main focus on Microsoft’s Q2 numbers being of particular interest. These saw the software giant record revenues of $52.7bn, which was slightly below expectations, with profits of $2.32c a share.

As expected, personal computing and gaming revenue was disappointing, falling short of forecasts at $14.24bn, however this was offset by strong cloud revenue of $27.1bn. Windows OEM revenue fell 39%, while Xbox content and services saw a decline of 12%. On guidance Microsoft was rather pessimistic suggesting that Azure growth would slow, and that new business was already becoming more difficult. Microsoft also said subscriptions were also likely to slow, and that revenues would remain flat in Q3.

Looking ahead to today’s European session the pessimistic outlook to last night’s earnings numbers looks set to see a slightly lower open.

With UK inflation seeing a step-down last week to 10.5%, it remains painfully high for a lot of people, and on the RPI measure is even higher. In December, the ONS took the decision to pull the release for PPI inflation due to problems with some of the calculations, with respect to diesel prices as well as the food prices calculation. 

This is significant as PPI can act as a leading indicator as to what is coming down the line when it comes to inflationary, as well as disinflationary forces. Prior to the ONS pulling the numbers in December there had been evidence that factory gate prices had been falling sharply with the last recorded October numbers seeing a slowing in inflationary pressure from the peaks in the summer.

If we get a further sharp slowdown in the annual numbers, this ought to give confidence that the headline numbers will also see similar falls in the coming months. Annualised input numbers in October came in at 19.5%, down from 20.8%, while output prices for October came in at 17.2%.

Monthly input price estimates for today’s December numbers are for a decline of -0.8%.

With energy prices continuing to fall over the winter, we’ve started to see gradual improvements in economic activity across the euro area. This improvement has been reflected in the better-than-expected German manufacturing numbers yesterday and was also responsible for a better than forecast improvement in German IFO business sentiment in December to 88.3.

This trend is expected to continue in today’s January numbers with another improvement to 90.3, with the current assessment also set to improve to 94.9, and expectations set to rise to 85.3, from 83.2.

It was back in October that the Bank of Canada set the cat amongst the pigeons when it raised rates by a less than expected 50bps to 3.75%, in a move that suggests that central banks were starting to wake up to the possibility that too aggressive rate rises could do more harm than good.

They then followed that with another 50bps rate rise in December, to 4.25%, as concern grew that raising rates too high could create problems in the housing market.

With today’s decision coming a week before next week’s Federal Reserve decision, a lot of people are looking at the Bank of Canada for a steer in terms of whether we could see a step down from the Fed. It is widely anticipated that the BoC will announce another step down to 25bps, after headline inflation fell back to 6.4% from 6.8% in December. Median core prices however have remained sticky, remaining at 5% in November and up at the highs of the year, which in turn may mean the Bank of Canada could decide to err towards 50bps.  

EUR/USD – Currently range trading between the highs this week at 1.0927, and wider resistance at the 1.0950 area which is 50% retracement of the move from the 2021 highs to last year’s lows at 0.9536. A move through 1.0950 opens up a move towards 1.1110. Support remains back at the 1.0780 area.

GBP/USD – Continues to struggle below the 1.2450 area and slipped back to towards the 1.2250/60 area. Above 1.2450 could see a move towards 1.2600. A move below 1.2250 could see a move towards 1.2170. 

EUR/GBP – Having found support above the 50- and 100-day SMA last week the bias remains for a return to the recent highs at 0.8900. The next support below 0.8720 targets 0.8680.

USD/JPY – Found resistance just above 131.00 yesterday, before slipping back. A move through 131.60 and last week’s high potentially targets a return to the 132.50 area in the short to medium term. Support currently at the 128.20 area as well as the lows last week at 127.20. 

FTSE 100 is expected to open 5 points higher at 7,762.

DAX is expected to open 25 points lower at 15,067.

CAC40 is expected to open 10 points lower at 7,040.

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