Yesterday’s price action was pretty symptomatic of a market riven by caution ahead of this week’s long anticipated Federal Reserve rate meeting. An indifferent European session came off the back of a poor Asia session after China data disappointed yet again, and US markets also finished lower after initially opening in positive territory, as uncertainty reigned supreme, with investors reluctant to take on large scale new positions ahead of this week’s key decision. The disappointment surrounding the weekend Chinese data is likely to see further easing from Chinese authorities in the coming weeks, which in turn is likely to see further yuan weakness, in the process transmitting a disinflationary drag into the global economy. With this week’s decision finely balanced attention will continue to be fixed on the latest US data, with the latest US retail sales data for August likely to be scrutinised for any evidence that US consumers are starting to pick up the pace with respect to their spending patterns. Thus far this year US consumers have been fairly cautious despite the fiscal boost of lower gasoline prices, and while consumer confidence has been improving, for most of this year it has borne no relation whatsoever with respect to the hard sales data. Expectations are for a rise of 0.3%, down from July’s 0.6%, still fairly positive, but given weak inflation fairly surprising, though weak wages growth could well play into that. The manufacturing sector continues to be a cause for concern though and it is becoming apparent that some on the FOMC are concerned about the weakness in that sector. New York Fed President Bill Dudley said recently that the case for a September rate move had become less compelling. He probably had in mind the sharp unexpected fall in the New York Empire manufacturing survey seen in August which saw it decline to -14.9 well below the 5 expected. While an improvement is predicted for September it still doesn’t paint a picture of particular resilience with a figure of -0.5 expected. With rig counts in the US continuing to decline the latest industrial and manufacturing production numbers for August are also expected to be weak, at around -0.2%, once again making Thursday’s decision a finely balanced high wire act for the US central bank. Before that we get another snapshot of the UK economy after last week’s Bank of England decision to keep UK rates on hold for yet another month. The fact that we didn’t see any further dissent with respect to a rate rise wasn’t much of a surprise given recent data, but we continue to hear from policymakers that a rate rise remains close. Today’s inflation data is unlikely to reinforce that narrative with August inflation set to remain weak with annual CPI set to fall back to 0% from 0.1% in July. Even more importantly core CPI inflation is also expected to fall further from 1.2% in July to 1%. Retail prices (RPI) are also set to decline further as well, below the 1% level to 0.9% as lower fuel and clothing prices weigh on prices. In Europe we will also get the latest German ZEW economic sentiment survey for September. In the August numbers we saw a drop to the lowest levels seen this year at 25 and expectations for this month are no better with a further fall to 18.3 expected. EURUSD – the euro continues to inch back towards the 1.1400 level with a strong finish last week. Now back above the 200 day MA the 1.1280 level should act as interim support, with the larger support level at the 100 day MA just above 1.1100. A move through 1.1400 retargets the 1.1700 highs seen in August. GBPUSD – having hit a peak of 1.5475 last week the pound is now back above the 200 day MA at 1.5350. To push on towards and beyond 1.5530 we need to hold above the 1.5330 area. Only a move below the 1.5170 tweezer lows argues for a test of the May lows at 1.5080. EURGBP – appears to be building for a break higher, with a move through 0.7400 potentially targeting a move to 0.7500. Last weeks close above the 200 day MA at 0.7325 has the potential to be fairly bullish. Below 0.7230 suggests a return to 0.7180. USDJPY – a bit of sideways trading going on here with key resistance at 121.75. The US dollar still looks vulnerable to a return to the 116.20 area seen a couple of weeks ago, but for now appears to be range trading between 118.50 and 121.50. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
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