European markets are on the front foot after a positive handover from Asia and Wall Street shrugged off the risk-off US inflation and retail sales data to notch a four-day win streak. Buy the dip mentality remains intact – but for how long can this be sustained when yields continue to push higher and higher? US ten year yields have risen to 2.94% and the question is – what’s going to stop them from rolling on up to 3%? At that level we can expect renewed equity market jitters. Three percent on the 10yr equates to more angst and makes equities uncomfortable. But it’s not just the level but the speed of the tightening that is catching markets wrong-footed. What may be prove positive for equities from here is that the risk premium of the rise in yields (and pace of the rise) may have already been adjusted to, which may explain why stocks rallied despite yesterday’s ostensibly risk-off data.

While stocks are proving resilient – perhaps because this was an event risk well and truly priced in already – the USD continues to suffer. The word that has been whispered in some corners but really came up yesterday is stagflation. Rising inflation against softer growth is a concern for the Fed and might make it step back from hiking too quickly. It’s too early to call stagflation and it’s worth noting that growth remains robust, although we must note that GDP expectations have been revised sharply lower since the report.  USD remains shrouded by the fiscal outlook and concerns that we may be reaching the end of the cycle. Higher inflation, a slackening in growth and the US government running a higher deficit looks like a nasty cocktail of weakness for the dollar. Ironically, if the data makes the Fed take its foot off the pedal by refocusing its attention on more than just inflation, we could see the dollar bounce back.

Levels

GBPUSD – the Feb 8th high at 1.4065 is within sight but the pair is facing resistance on the 50% retracement of the decline off the Jan post-Brexit high was broken around 1.4057. A move past the Feb 8th high brings the Feb 1st high around 1.4280 into view. On the downside, support can be seen at 1.3940 in the short term, while longer term the 1.38 level proved decent support but a break below 1.3768 could take us back to the 1.35-36 range where the cable traded in early January before its ascent.

USDJPY dropped through support at 107.3 yesterday, the low of last September and continued on below the 106.7 region, the 38.2% retracement of the long term move from 75 to 125. Now the bears are just looking to tick off the round numbers all the way to 100. A recovery back above 107.3 might force it back up to the 108-110 range again.

EURUSD is testing 1.25 and a break there suggests a move to a fresh three-and-a-half year high above 1.2540. Then we’re looking at 1.26 region to mark the 61.8% retracement of the high-low swing from April 2014 to November 2017. On the downside, 1.23 looks to offer firm support but a break calls for 1.22, the Feb 9th lows.

Bitcoin’s recovery continues with a break above trendline resistance (see below chart) potentially signally a new phase of bullishness. The move clear of 8800 means bitcoin has broken out of its broad downtrend since December and is through the 23.61% retracement of the rout at 9200. It’s now seen consolidating above this level and might be preparing for a push out to 1100 and the 38.2% retracement around 11160, which is also the mid-point of a range it traded in for the second half of Jan.

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