European markets had a rocky start to the week after the latest German manufacturing PMI for September slumped to a ten-year low of 41.4, a level worse than was seen at the height of the European sovereign debt crisis, while US markets largely trod water.

What was even more concerning was that the flash services numbers from both France and Germany were also weaker than expected, raising concerns that whatever the European Central Bank tries to do to mitigate the slowdown, it probably won’t be enough in the absence of significant reform by governments, against a backdrop of an increasingly divided central bank governing council.

Today’s German business IFO numbers could reinforce this bearish narrative if they also show similar signs of economic weakness that we saw in yesterday’s flash PMI data.

Last month the IFO survey came in at a seven-year low of 94.3, and is widely seen as an accurate barometer for future growth in the German economy. In 2018 it was rebalanced to include more services related businesses so as to more accurately reflect the cross section of the Germany economy.

Earlier this month the IFO institute warned that the weakness being seen in the German economy would start to infect the services sector, and as such cut its outlook for the economy over the next two years. It cut its forecast for this year to 0.5% and to 1.2% from 1.7% for 2020, but also warned that these scenarios assumed that there wouldn’t be a disruptive Brexit as well as no further escalations in US, China trade.

Expectations for today’s German IFO Business climate are for a slight improvement from August’s 94.3 to 94.5, however yesterday’s flash PMI numbers do rather cast that optimism into doubt.

It’s also set to be an important day for the pound with the UK Supreme Court set to give its ruling on the government’s proroguing of Parliament, and whether it is a justiciable matter.

In what could potentially be an explosive precedent the court could rule that the decision to end the parliamentary session was an illegal act. Both English and Northern Irish courts dismissed the charge of illegal prorogation, while a Scottish court ruled it was illegal, meaning today’s decision could go either way.

The government’s argument is that the prorogation is at the discretion of the Prime Minister and that MPs have tools available to constitutionally replace the government, including a vote of no confidence, but refuses to do so for political reasons and therefore outside the discretion of the courts.

The court on the other hand may choose to disagree, however it may find itself limited in whatever remedies it can infer, though the government has said it will carry out any ruling the court makes.

On the data front we have the latest public sector borrowing numbers which are expected to show the government borrowed £6.5bn in August.

In the US we’ll get to see the latest consumer confidence numbers for September. The US consumer can best be described as the spine of the US economy and has remained solidly resilient for most of this year, even when President Trump ramped up the trade rhetoric at the beginning of August, by imposing tariffs on the remaining $300bn of Chinese goods.

As we come to the end of Q3 investors will be looking for signs that US consumers are starting to lose confidence in the resilience of the US economy. Evidence of that has thus far been scant with wages still growing strongly and unemployment at multi year lows. A sharp decline in September consumer confidence could be an early sign that sentiment is starting to shift. Expectations are for a modest decline from 135.1 to 133.00.

EURUSD – still remains shy of the 1.0925 lows of this month, but continues to find itself difficult to rally. We currently have resistance back near the 50-day MA now at 1.1105. While below here and the trendline from the June peaks, the risk remains for a retest of the lows, and a move towards 1.0800.

GBPUSD – feels like we could have seen a short term peak at 1.2582 last week, in the short term with further resistance at the 200-day MA at 1.2740.  We have support at the last weeks low at 1.2380, while below that larger support at the 1.2280 area.

EURGBP – found support at the 0.8785/95 level last week, which is the 61.8% retracement of the entire 0.8475/ 0.9325 up move. We could squeeze back to the 0.8900 area where we have resistance. A break below 0.8780 opens up 0.8720.

USDJPY – feels like it wants to go lower after last week’s failure at 108.50, and bearish daily reversal, opening up the prospect of a move back to the 107.20 level, and 106.00. Only a move back above 108.50 has the potential to negate, and argue for a move to 109.20.


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