European markets spent most of yesterday edging cautiously higher, with the FTSE100 shrugging off the UK government’s decision to impose a 25% windfall tax on the oil and gas sector, while at the same time unveiling a fiscal stimulus package.

The decision to impose the controversial tax appears to have prompted a review of their investment plans, on the part of BP, who had previously committed £18bn of investment into the UK economy by the end of 2030. Who could possibly have foreseen that?

Putting the windfall tax to one side, yesterday’s gains started to accelerate during the late afternoon after US markets opened, with retail stocks leading the way higher, on both sides of the Atlantic.

US retail helped set the tone with strong gains from the likes of Dollar Tree and Dollar General who topped the gainers on the S&P500 after Dollar Tree lifted its full year outlook for revenues to just shy of $28bn, after enterprise same store sales rose by 4.4%.

With all the doom and gloom surrounding US retail over the past couple of weeks the numbers were a welcome tonic, with this week’s decent numbers from Macy’s and Nordstrom adding to the momentum, as US markets finished a strong session with decent gains.

As we look ahead to a mixed European open it’s been another choppy week, albeit with a positive bias, with the FTSE100 on track for its strongest week of gains since March, driven by a rebound in the retail sector, with the likes of Ocado, Kingfisher, Marks & Spencer performing strongly.

The battle to contain the inflation genie appears to have started in earnest, with the Federal Reserve fresh from raising rates by 25bps in March, following that up with a 50bps rate rise earlier this month, with the promise of another two 50bps moves in June and July.

In the recent CPI numbers, there does appear to be increasing optimism that inflationary pressures are starting to near their peak, although the jury remains out on that. While headline CPI has seen a modest fall to 8.3% in April, producer prices have proved to be slightly more resilient than perhaps Fed officials would like.

The only positive is that the strength of the US dollar is likely to act as an anchor on upward inflationary pressure, and this could start to exert some downside pressure on the headline numbers, although there are early signs that the US dollar move higher has started to run out of steam, as we look to a second successive week of declines, after six consecutive weeks of gains.

Yesterday in the latest quarterly Q1 GDP numbers the Core PCE number fell back from 5.2% to 5.1%, and US policymakers will be looking for further signs that the current bout of inflation is starting to run out of steam and slip back.

Today’s US PCE Core Deflator could offer some clues about that, with the hope that we could see a decline to 4.9% from 5.2% in March. PCE Core Deflator is the Fed’s preferred inflation targeting measure and a softer number here, could give further encouragement to the view that we might see rate pause in September, after Atlanta Fed President Bostic floated the idea earlier this week. The PCE Deflator is expected to fall to 6.2% from 6.6%.

Personal Spending for April is expected to rise by 0.7%, down modestly from 1.1% in March, with personal income set to increase 0.5%.

EUR/USD – We have trend line resistance from the highs this year, as well as the 50-day MA, currently at 1.0760 area. We currently have support at the 1.0530 area.

GBP/USD – Still struggling to gain traction above the 1.2600 area. We need to see a move beyond the 1.2630 area to argue a short-term base is in. Below the 1.2470 area, argues for a move to the 1.2320 area. Above 1.2630 argues for a return to the 1.2830 area

EUR/GBP – Finding support at the 0.8480 area with resistance at 0.8530. Still range bound within the wider range of 0.8200/0.8600. A move through 0.8470 retargets the 0.8420 area.  

USD/JPY – Continues to hold above the 50-day MA, with a break potentially opening a move towards the 123.00 area. We currently have resistance at the 128.30 area, as well as trend line resistance from the highs this month currently at 127.80.

FTSE 100 is expected to open 10 points lower at 7,554.

DAX is expected to open 49 points higher at 14,280.

CAC40 is expected to open 19 points higher at 6,429.

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