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Equities steady, Sterling and UK retail sales in focus

Stocks had a positive session yesterday as traders adjusted to the new round of tariffs from the US and China that were released during the week. 

Trade tensions have stepped up, but you wouldn’t know it to look at European and US equity markets. The $200 billion worth of tariffs from Trump, and Beijing’s reaction weren’t exactly a surprise. Investors are cautiously optimistic as that round of tariffs weren’t too severe. Equities in Asia overnight were mixed as the mood isn’t particularly strong one way or another. The Trump administration and Beijing have hardened their positions, but as long as trading relations don’t take another sour turn, investors could remain upbeat.    

Yesterday’s move in the pound summed up sterling’s activity in the last few months. The pound jumped after the UK CPI rate hit 2.7% in August – a six month high. The core reading reached 2.1%, up from 1.9% in July. Demand is clearly strong in the UK, and given the low unemployment rate and the respectable earnings rate it isn’t much of a surprise.

The EU criticised Prime Minister May’s Brexit proposal and stated the UK plans need to be reworked. Mrs May was critical of the EU’s ‘improved’ offer as it would effectively put a customs barrier between Great Britain and Northern Ireland. The possibility of a deal being reached is still ‘far away’ according to Brussels.

In terms of the pound’s movements, it was one step forwards and two steps backwards. The British economy is performing well, but unfortunately, the toing and froing over Brexit is outweighing the solid economic updates.

At 9.30am (UK time) the UK will release the latest retail sales report. The consensus estimate is for a 0.2% decline on a monthly basis, and that would be a sharp fall from the 0.7% jump in July. Traders will be watching this report closely as consumer appetite needs to be healthy to drive the economy along.

It is believed that the Italian government is going to comply with EU fiscal rules, and although it may provide a short-term boost to the Italian stock market, it could trigger fighting with the coalition. The 5 Star Movement and Lega party were voted into power to stand up to Brussels and introduce radial policies like higher public spending and lower taxation. If the election promises are not adhered to, it may bring about a political crisis down the line.  

Oil was given a lift in the wake of the decline in US oil and gasoline stockpiles. The Energy Information Administration report showed that oil and gasoline inventories fell by 2.05 million barrels and 1.71 million barrels respectively. The report came amid a backdrop of supply concerns as the US will impose sanctions on Iran come November.  

At 3pm (UK time) the US will release the August existing home sales report, and economists are anticipating 5.35 million, and that would be a slight increase on July’s 5.34 million. Keep in mind we saw some mixed housing data from the US yesterday. Building permits fell on the month and came in below estimates, while housing starts grew on the month and topped forecasts.

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 112.15. Support might be found at 109.77 – the 200-day moving average.

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