Having seen King Felipe pass up the opportunity to dial down the tension between the government in Madrid and politicians in Barcelona earlier this week, the response from the Catalan government was entirely predictable.

When Catalan President Carlos Puigdemont responded to the Kings comments last night a lot of people were expecting him to announce that his government would implement the result of the referendum and declare independence immediately. Rather than doing that, and potentially playing his last card, he reiterated an offer for mediated talks, though he held open the expectation that an announcement could well happen soon, while also lambasting the government in Madrid as well as the intervention of the Spanish monarch in abandoning his political neutrality.

The intervention by the King does come across as rather unwise given his largely ceremonial role, and the fact that he is unelected. This is why here in the UK Queen Elizabeth II didn’t express a view when the Scottish referendum was being debated in 2014, even though several attempts were made to find out what her views were.

The continuing deadlock hasn’t done the Spanish stock market any favours, as it posted its biggest one day fall in fifteen months and fell below the 10,000 level for the first time since March this year, while Spanish and Catalan borrowing costs surged as investors sold Spanish and Catalan government debt.

For now tensions remain high as both sides look to the next move. It is expected that some form of declaration might be made next week when the Catalan parliament is due to sit to discuss recent events. That is always assuming they are allowed to and the Spanish government doesn’t implement article 155 of the Spanish constitution and prevent the sitting from taking place, and impose direct rule from Madrid.

It almost feels like that is what the Catalan President is hoping the government will do exactly that, which in turn is likely to ratchet up the tension further.

While Spanish stocks nosedived the German DAX went the other way posting new record highs as money flowed out of Spain and into German equities.

In the US we once again new record highs for after the September ISM services report followed in the footsteps of Monday’s manufacturing numbers in blowing through expectations.

Not only did the report beat on the headline number, hitting a twelve year high at 59.8, but it also saw evidence of rising prices as prices paid hit a five and a half year high.

The robustness of these reports was all the more surprising given recent disruptions from hurricanes Irma and Harvey, and while the ADP employment report was on the weak side, there was nothing in it to suggest that the Federal Reserve won’t add another rate rise this year, despite the disruption from the storms.

It is still somewhat surprising that the rising inflation being seen in these reports hasn’t as yet started to manifest itself in the official inflation numbers, let alone in wages. Investors will be looking to tomorrow’s payroll and wages numbers for evidence of the start of this.

The pound had a positive day yesterday despite the goings on at yesterday’s Conservative party conference where pretty much anything that could go wrong did go wrong. The focus was more on the latest services PMI data which was slightly better than expected, though price pressures remained elevated, which suggests that the Bank of England will be keen to keep a floor under the pound in order to keep inflationary pressures in check.

We could get further clues on central bank intentions later today with both Ian McCafferty, who voted for a rate rise at the last meeting, and Bank of England Chief economist Andrew Haldane, both due to give speeches later today in London.

EURUSD – continues to trade below the 1.1830 area and until we are able to push back above it the risk remains for a drift back down towards the 1.1600 area. Only a move back above the 1.1830 area has the potential to stabilise and argue for a return to the 1.1920 area.

GBPUSD – finding some support around the 1.3220 area, with a break below targeting the 1.3120 area. A move back through 1.3340 is needed to stabilise and argue for a move back to 1.3420.

EURGBP – needs to push beyond the 0.8900 area to argue for a return towards 0.8970. Support currently at the 0.8820 area with a break below targeting the 0.8740 level.  

USDJPY – still finding selling interest near the 113.20 level, but feels like we could extend towards 114.00. A failure here retargets the 112.20 level and below that a return towards 111.30.

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