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Equities steady despite rocky trading relations, UK CPI in focus

Stocks largely finished higher yesterday despite a further deterioration in the US-China trading relationship. 

The Trump administration will be slapping a 10% levy on $200 billion worth of Chinese imports, and the levy could increase to 25% in the New Year. Beijing responded with $60 billion worth of tariffs on US imports, and the levy will be between 5% and 10%.

All things considered the tit-for-tat tariff spat could have been a lot worse. Investors reacted relatively well to the news, but the standoff is even further from being resolved so this situation is likely to resurface again. The US tech sector outperformed yesterday, partially because many big name stocks like Amazon and Apple suffered on Monday, as traders were fearful they would be impacted by Trump’s tariffs. The fact that the latest round of tariffs from the US excluded certain electronic goods, gave traders an extra reason to snap up tech stocks.    

Equities had a positive run in Asia overnight as the Bank of Japan kept interest rates unchanged, and a Chinese policy marker, Li Keqiang, said the Beijing administration has ‘sufficient tools’ to deal with the risks associated with the global trading environment.   

At 9.30am (UK time) the UK will release the latest inflation figures, and the annual CPI rate is expected to dip to 2.4% in August, down from 2.5% in July. The annual core inflation rate is expected to come in at 1.8%, down from 1 9%. The core number gives us a better picture of demand as it strips out volatile components of the inflation report like food and energy. The latest wages figures from the UK showed that average earnings excluding bonuses were 2.9%, and the British worker is getting a real increase in income.  

At the same time the UK will also release the retail price index report for August, and economists are expecting it to remain unchanged at 3.2%. The producer price index (PPI) output report will also be announced, and the traders are expecting 2.9%, down from 3.1% in July. The PPI report will be closely watched too as it can often be a leading indicator, in that, price changes at the factory level are often passed on to the consumer.

The reports could add volatility to the pound. Despite the uncertainty surrounding Brexit, sterling has gained ground versus the US dollar and the euro recently. Stripping away the political headlines, the latest growth, unemployment and earnings figures have been respectable. Yesterday it was reported that the EU negotiator, Michel Barnier, was willing to ‘improve’ their offer in relation to the Irish border, and this could increase the chances of a deal being reached.

Oil had a positive session yesterday after Saudi Arabia said they were comfortable with Brent crude oil above $80.00 per barrel. The major oil-producing nation raised output as to try and keep a lid on the price, as a favour to the US There are supply concerns ahead of the US sanctions being imposed on Iran in November. The Energy Information Agency will release the latest US oil inventory figures at 3.30pm (UK time).

EUR/USD – despite the decent bounce back between mid and late August, the market remains in the wider downward trend that began in April, and while it stays below the 1.1750 level, its outlook could remain bearish. 1.1510 might act as support and a break below that mark could bring 1.1300 into play. If 1.1750 is cleared, 1.1850 could be targeted.

GBP/USD – has been pushing higher since mid-August, and if it can hold above the 1.3000 mark, it could edge up towards the 1.3200 area. A move below 1.3000 might bring 1.2785 into play, and below that support might be found at 1.2661.

EUR/GBP – the key week and day reversal that we saw in late August could point to further losses and support might come into play at 0.8835 – 200-day moving average. If the wider uptrend continues it could target 0.9100 or 0.9160. 

USD/JPY – the upward trend that began in March is still intact, and if the positive move continues it might target 113.18. Support might be found at 109.77 – the 200-day moving average.

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