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Stocks called lower, oil slightly rebounds

Chinese CPI came in at 2.1%, above economists expectations for a reading of 1.9%, while the June reading was 1.9%. 

The PPI reading for July was 4.6%, while dealers were anticipating 4.4% and the previous reading was 4.7%. These reports suggest that demand in China is still firm. Traders will be paying close attention to the major economic indicators from China to see if the US tariffs are hurting the economy. On Wednesday, Chinese exports and imports comfortably beat analysts’ forecasts, so the Chinese economy is still holding up well.

Yesterday, China continued to play the tit-for-tat tariff game with the US, as Beijing announced plans to impose levies on $16 billion worth of US imports, and they will take effect later this month. The very action of the tariffs says more about China’s rationale than the size of the initiative. I suspect that the Chinese government wants to let Mr Trump know that they will not be pushed around, and at the same time they don’t want to ratchet up tensions by unveiling a huge series of tariffs. Mr Trump is not a man to back down easily and some sort of response can be expected.    

At 1.30pm (UK time) the US will release the July PPI report, and the consensus estimate is for it to remain flat at 3.4% - which is a multi-year high. The core PPI report will be announced at the same time, and traders are expecting it to hold steady at 2.8% - its highest reading in a few years. Demand at the factory level is clearly picking up, and it could set the tone for Friday’s inflation report. There is growing speculation that the Federal Reserve will hike interest rates in September and in December, and a firm levels of demand would justify their monetary tightening.

Oil sold-off heavily in the wake of the Energy Information Administration report. US oil stockpiles fell by less than expected. The update showed a drop of 1.35 million barrels, while the consensus estimate was for a 3.3 million barrel drop. On the other hand, gasoline stockpiles jumped by 2.9 million barrels, while traders were expecting a 1.7 million barrel fall. The numbers paint a picture of diminishing demand, and that prompted traders to dump oil.

Sterling suffered greatly yesterday as Brexit-related fears were doing the rounds. GBP/USD fell to a level not seen since late August last year, and EUR/GBP hit a level last seen in November 2017. The pound is still coming under pressure from Liam Fox’s comments – the possibility of a ‘no-deal Brexit’ is 60-40. Dealers are extremely fearful about the prospect of the UK leaving the EU without an agreement in place, and until some clarity is provided, the pound would remain weak.

EUR/USD – remains below the trend line from the June high, and while it remains below the 1.1720 area its outlook could remain negative. A break below the 1.1510 area, might bring about further losses. A move back above 1.1720, could bring 1.1850 into play. 

GBP/USD – has been in a downtrend since April, and if the bearish move continues it could target 1.2800. Pullbacks might run into resistance at 1.3197 – 50-day moving average, or 1.3363.      

EUR/GBP – has been pushing higher since April and if the bullish run continues it could target 0.9050. A move lower might find support at 0.8900 or 0.8844. 

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 110.00 – the 200-day moving average.

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