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US records set to underpin Europe on the open

European stock markets had another decent day yesterday making new six week highs, while the FTSE100 got a welcome respite after the pound slipped back from its recent new post Brexit peaks against the US dollar.

US stock markets also continued where they left off on Friday posting new record highs as investors geared up for tomorrows Federal Reserve rate meeting and press conference, with the US central bank expected to embark on the first baby steps on the paring down of its balance sheet.

Despite recent poor US economic data there still seems to be a belief amongst some in the markets that we could see one more rate hike this year, something that may well be borne out by tomorrow’s rate dot plot projections. Whether the projections survive their exposure to the real world of the hurricane clear up of Harvey and Irma is another matter, not to mention the prospect of further hurricanes with the latest in the form of Maria as it moves towards Puerto Rico. 

The latest geopolitical situation appears to have settled down for now but with President Trump set to speak at the United Nations later today it wouldn’t be too much of a surprise if North Korea decided to send him a message so to speak, perhaps in the form of another missile test. While the rhetoric appears to have settled down a touch it probably wouldn’t take much to set it all off again.

The pound appeared to suffer a bit of post rally hangover yesterday, slipping back on profit taking after its strongest weekly performance in eight years last week. Bank of England governor Mark Carney didn’t deviate too much from last week’s script about the potential for an increase in rates, though he did stress that Brexit could prompt a period of higher prices as the economy adapts to a slightly more restrictive outlook as trade relationships change over the coming years.

To guard against this it appears that the Bank of England is looking to mitigate some of the impact of higher prices by helping put a floor under the pound in seeking to keep pace with other central banks attempts to start the paring back of their own stimulus packages.

On the data front the latest German ZEW economic sentiment survey for September is expected to improve slightly to 12.3, after the surprise slump seen in August from 17.5 in July to 10.

The recent progress in the euro appears to have stalled in recent days no doubt as a result of this weekend’s upcoming German elections. It is unlikely we’ll see too much in the way of surprises, with the only mystery likely to be around who Angela Merkel’s coalition partners are likely to be.

As far as political risk, markets are under-pricing it simply because both main parties are pro-European, with the SPD under Martin Schulz probably even more pro Europe than Angela Merkel’s Christian Democrats.

EURUSD – currently struggling to push back through the 1.2000 area. A failure to overcome this level could well see a retest of the 1.1820 area. A break below 1.1800 opens up the 1.1600 area. For now the larger resistance remains at the 1.2170 level which is the 50% retracement of the 1.3995/1.0340 down move.

GBPUSD – the pound has slipped back from the 1.3620 area dropping back below 1.3500 in the process. We could slip back towards the 100 week MA at 1.3400, without damaging the upside progress. This weekly close shifts the bias for a potential move to the 1.4000 area. Support now comes in at the 1.3400 area as well as the 1.3320 area.

EURGBP – has found some support at the 0.8770/80 area. We could well see a short squeeze back through the 100 day MA at 0.8860, with bigger resistance at the 0.8980 area. A failure to overcome these levels argues for a return to the 200 day MA at 0.8700.  

USDJPY – has found resistance at the top of the cloud at the 111.70 area. If we break through here we could well retest the 112.40 area. We now have support back down near the 109.80 area.

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