After a strong session on Tuesday, both European and US markets slipped back yesterday, as the good earnings news from the start of the week, lost some of its lustre in some of the reports and economic announcements from Wednesday.

The latest Fed minutes also revealed that policymakers explored the possibility of overtightening so to speak, by way of pushing up rates to the point that rather than being accommodative, they become “modestly restrictive” over concerns that inflationary pressures get a little too hot.

This was a particularly notable development and might raise the prospect that the Fed might decide to hike in higher increments, perhaps by 50 points in December rather than the 25bps we’ve become accustomed to recently.

There was nothing in the minutes to suggest that policymakers were in any mood to resile from the current pace of tightening with another rise in rates set to come in December, with potentially three to four more to come in 2019, and this lent a negative tone to markets in Asia which slipped back, while markets here in Europe look set to open unchanged.

Concerns about the impact of tariffs were discussed but overall if President Trump was looking for indications that some Fed policymakers were having doubts about the pace of monetary tightening they certainly weren’t reflected in these minutes, and if anything, the tone of the discussions pointed to an almost overzealousness in tightening too much, than any concern that they were moving too fast.

This would suggest that the already uneasy relationship between the Federal Reserve and the US President is likely to continue to get a lot noisier in the coming months.

US bond yields not unexpectedly pushed back up with the 10 year back up at the 3.2% level once again, and while US markets did slip back they did manage to close well off their lowest levels of the day, as investors looked towards further upcoming earnings announcements over the next couple of weeks.

The US dollar also had a strong session, pushing back above the 95.00 level against a basket of currencies, rising the most against the Canadian dollar which slipped back sharply after US crude oil prices crashed back below $70 a barrel, after inventory data showed a 6m barrel build for the second week in succession.

The pound has had a rather mixed couple of days, boosted by wages data that was the best since 2009, but then undermined by a weaker than expected headline CPI number for September of 2.4%.

If this trend of rising wages is maintained this should bode well for consumer spending in the coming months, even if today’s retail sales number for September is expected to show a small decline to round off what is expected to be a decent quarter for the UK economy. In the first two months of Q3 we’ve seen a 0.7% and a 0.3% rise in retail sales for July and August respectively. Given the decent summer it wouldn’t be unexpected to see consumers pare back their spending once the schools go back, with expectations of a 0.4% decline.

This has been a pattern in recent quarters with the final month of the last four quarters posting a negative reading for retail sales, following gains in the first two months.

The euro has also slipped back on reports that the EU Commission has or would be rejecting Italy’s budget proposals, sending Italian 10-year yields back above 3.5%, though this shouldn’t really have come as a surprise.

EURUSD – has continued to drift back lower after the failure to get back above 1.1620 this week. The next support remains at the previous lows at the 1.1460 area, with a break retargeting the 1.1200 area.

GBPUSD – continues to remain vulnerable to further losses towards the lows this week at 1.3080, while below the 1.3250 area. Key support remains back at the 50 day MA and trend line support from the 1.2660 lows at 1.2980.

EURGBP – while below the highs this week at 0.8825 the risk remains skewed to the downside and a retest of the lows at 0.8720, and below that at 0.8640. Only above the 200-day MA at 0.8825, retargets the 0.8870 level.

USDJPY – having found support at the 111.60 trend line support from the March lows the US dollar looks set to retest the previous highs at 114.60. We also have resistance at 113.30. A break below 111.50 suggests the prospect of further losses towards 111.20, and even the 200-day MA at 110.35.
 

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