A tentative start to the week for European markets, while US equity markets remain in parabolic mode after fresh record highs on Friday for the Dow, S&P 500 and Nasdaq. DAX, FTSE and CAC are all just about in positive territory but there’s a palpable lack of movement in equities as bonds fall.

US 10s just hit 2.71%, while German bund yields are also on the march higher with the 5-year turning positive for the first time since 2015. It does look like this is capitulation time for bond bulls as yields are entering breakout mode, which will have important consequences for equity valuations. At this stage in the cycle it makes sense for yields to be climbing but breakout beyond the 30-year trend line does signal the bond bears are here at last. A spike to 3% in the 10-year now looks very possible and a bond market rout could spook the market.

Sterling has slackened to a little above $1.41, a couple of cents off last week’s post-Brexit highs above $1.43. The dollar remains the story here and the dollar index is currently hunkering down on the 89 handle having firmed a little in Asia overnight. The conundrum of rising US yields and a falling dollar remains in place but with dollar shorts getting crowded traders should be wary of a squeeze.

The euro is trying to hold onto $1.24 after the dollar firmed. Governing Council member Klass Knot’s call for APP to end as soon as possible was probably just noise as he is already one of the most hawkish members of the board. The yen held gains as Japan currency chief Masatsugu Asakawa said Tokyo would not manipulate the yen.

Chief focus for today is the US PCE inflation numbers. Core PCE has undershot the Fed’s target since 2012 but the most recent CPI inflation figures may suggest we might be in for an uptick. The Labor Department’s core CPI reading rose 0.3% in December, the biggest advance in 11 months. It means core CPI rose 1.8% in 2017, up from 1.7% in the 12 months through November.

This week also sees the last Fed meeting chaired by Janet Yellen. No change expected but we might now be about to see a decidedly hawkish shift by the FOMC as Jay Powell takes over and doves Neel Kashkari and Charles Evans rotate out of the voting cohort and Loretta Mester joins. A more hawkish statement on Wednesday night could further fuel bond yields but it remains to be seen whether the dollar is responsive any longer to such moves. We will also need to see to what extent Fed policymakers start to alter their outlook following the tax reform.

Ahead of this President Trump’s first State of the Union address should be one to watch. More rhetoric on trade may be expected as Trump sets out his agenda ahead of the mid-terms later this year. With trade now central for currency markets, this could cause continued volatility in the USD. Strong-dollar or weak-dollar jawboning aside, we know that the President wants to boost exports and narrow deficits with trading partners, which calls for a weaker USD. At present the market seems to be buying into this thesis but fundamentals may start to show themselves again in USD as the economy expands and the Fed tightens.

Levels:

GBPUSD uptrend could be reversing. A slight up day on Friday but the long upper shadow on the candle suggests firm rejection of orders of anything in Thursday’s open-close range above $1.4150. Thursday’s low of $1.4083 offers near-term support. A move below $1.40 could mark the end of the rally and calls for a move to 1.38580, the 61.8% retracement of the pre-Brexit high to post-Brexit low.

EURUSD is doing its best to stay in touch with $1.24. Support is found at $1.2385, the 23.61% retracement of the rally this month. Below that we have the Jan 25th lows tested at $1.2363. A move out past $1.2538, Thursday’s high, calls for $1.26, the 61.80% retracement of the move from the $1.40 (2014 peaks) to $1.03, the low of Dec 2016.

For USDJPY, weakness persists and this means the 50-day moving average continues to converge on the 200-day. A break below could trigger fresh selling. Support at 109 went and next in view is 108.500, Thursday’s low which could bring 107.300 into play, last September’s low. Longer-term support is at 106.5, the 38.2% retracement of the Oct 2011-May 2015 rally. On the upside a number of failed attempts to break out past 109.800 suggest there is resistance before USDJPY can regain the 110 handle.

Finally a look at bitcoin, which opened a little higher before erasing gains. Overall sideways movement continues with precious little new for traders to get excited about. The $11,700/800 levels looks like providing firm resistance for now, constituting the 23.61% retracement of the rout from December’s all-time high to January’s lows. Friday’s low of $10.250 looks like providing support.