After the uncertainty of the last few days the tension does appear to have come down a notch or two, helped in some part by more clarity after the US said they weren’t looking to a policy on regime change in North Korea, while China also surprisingly agreed to ban imports of North Korean iron, lead and coal as part of the new UN sanctions regime, adding pressure on the rogue state to ease back on its aggressive stance towards the US.

This easing of tension helped both European and US markets post decent gains yesterday, despite some disappointing Chinese economic data, with US recovering some of the big losses seen last Wednesday’s “fire and fury” sell-off, while Europe’s markets managed a more modest rebound, with the DAX managing to from 4 month lows, finding support at the 200 day MA.

The recent Bank of England quarterly inflation report painted a rather more muted outlook for the UK economy through the rest of this year, while policymakers tried to make a rather unconvincing case that the markets were under-pricing the prospect of a rate rise.

This “smoke and mirrors” approach to monetary policy may well have worked a few years ago when markets were still coming to terms with the new approach of the Bank of England’s then new governor Mark Carney, after the so-called 'rock star' of central banking beguiled investors by introducing the concept of forward guidance. While effective at the time, the concept now appears to be looking a little tired, and the enthusiasm that greeted his arrival has also diminished, with the governor now likened to an 'unreliable boyfriend' for his ability to appear to switch from dovish to hawkish and then back again on an almost week to week basis. 

It was Alan Greenspan who famously said “If I seem unduly clear to you, you must have misunderstood what I said” and it is true that central bankers sometimes need to be ambiguous, however the Bank of England has turned it into an art form, meaning that markets no longer believe a word they say, even when they do have a message to get across.

When the last set of inflation numbers were released in June they showed a sharp fall in headline CPI from 2.9% to 2.6%, a welcome decline at a time when consumers have been feeling an increasing squeeze on their incomes. This fall raised hopes that inflation may well have peaked and today’s July CPI numbers could well go further in reinforcing that belief, though most expectations are for a tick back higher to 2.7%, while core CPI is also expected to rise to 2.5% from 2.4%.

A rise would be at odds with the recent softening in recent PPI numbers, which have slipped from 20% at the beginning of the year and could come in as low as 6.9% in today’s July numbers, but in line with the Bank of England’s forecasts which suggest we could see 3% before year end.

It’s also an important day for US data with the latest retail sales data for July expected to show a pickup in consumer spending after a lacklustre Q2, which saw April, May and June post negative readings.

The lack of inflationary pressure in the US economy was once again reinforced last week with a softer than expected June CPI number of 1.7%, while real average weekly earnings were also weaker than predicted.

This weak inflationary outlook appears to be causing some concern among some Fed policymakers though there are still some who remain fairly hawkish, New York Fed President William Dudley who said he still sees one more rate hike this year as well as the start of the paring down of the Fed’s balance sheet, in comments made last night.

Forex snapshot

EUR/USD – currently finding some selling interest at the 1.1850 level after last week’s brief dip to 1.1690. We still remain on course for a move towards the 1.2000 area, as long as the 1.1620 level holds in the short term.

GBP/USD – currently holding above the 1.2930 area with resistance at the 1.3030 area. A move above 1.3040 could retarget the 1.3100 area, while a break below 1.2920 targets trend line support at 1.2860.

EUR/GBP – found support just above the 0.9000 area in the middle of last week keeping the prospect of a move towards the 0.9300 level and last year’s high on the table. Only a move below the 0.8980 level undermines this and risks a pull back to the 0.8870 area.

USD/JPY – found support at the 108.70 area last week before rebounding strongly yesterday but to stabilise we need to push on through the 110.00 level towards 111.30, or risk further declines towards the 108.20 area.


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