Yesterday proved to be another mixed day for global equity markets with the Dow closing at another record high, while the rest of the major US benchmarks closed lower.

Today’s market open looks set to be a fairly quiet affair despite North Korea firing off yet another missile in a test that flew over Japan and landed in the Pacific Ocean. The missile launch prompted the sounding of sirens and alerts in Japan as well as the almost obligatory condemnation as the US once again urged China and Russia to do more.

This time global markets have reacted fairly calmly to the test, yet it is hard to escape the feeling that this so called shadow boxing between North Korea, and the rest of the world could end with a miscalculation from one side or the other. In a sign of this South Korea responded with some drills and missile tests of its own.

In Europe it was also a mixed day with the FTSE100 bearing the brunt of losses after some weak China data and another strong day for the pound saw it hit its highest levels in over a year against the US dollar, while it is also on course to post its best week this year against the euro.

Gilt yields also surged with the 2 year yield posting its best week this year, up 20 basis points on the week so far to 0.38%, while prices plunged as bond markets looked to price in the prospect of some form of tightening in the coming months.

We’ve certainly heard this song before from the Bank of England after they held rates yesterday, however the tone of the accompanying statement did appear to suggest a significant shift in tone after all the previous false alarms or misdirection’s from the central bank.

The reaction in the currency and bond markets would also appear to suggest that a rate rise or some sort of tightening might be coming down the pipe in the coming months.

The biggest problem now will be if the central bank rows back its rhetoric in the coming weeks. The response is likely to be unforgiving if the bank cries wolf again.

While the split remained the same in terms of 7-2 in keeping rates unchanged, with Michael Saunders and Ian McCafferty voting to raise rates, the most notable lines came in the form of the bank expecting inflation to push above 3% in the coming months, a significant change of tone. There was also a line that a majority sees scope for stimulus reduction in coming months, a view that was subsequently reinforced by governor Carney in comments later in the day.

The rise in the pound will certainly help ameliorate concerns about rising import costs and the potential for inflation becoming entrenched. It does appear from yesterday’s assessment by the Bank of England that their tolerance for higher inflation is becoming limited and much harder to justify especially with unemployment at a 42 year low, and this is being borne out in the bond markets where a December rate rise is being priced at a 55% possibility.

We could get some further clarity on yesterday’s events later this morning when external MPC member Gertjan Vlieghe makes a speech at an economist’s conference later today.

The US dollar had a rather more mixed day slipping back after US CPI showed that prices rose less than expected in August, ahead of next week’s Federal Reserve rates meeting. All eyes are likely to be on the latest retail sales data for August for any evidence of a hurricane effect.

Even though the numbers are expected to slow to 0.1% from the 0.6% number seen in July it’s unlikely there will be a big effect. While some might suggest that a slowdown could well be put down to hurricane Harvey, there may not be that much of an effect given that it made landfall on August 25th. There was also plenty of warning of the storm which means we might see a number that beats expectations due to people panic buying in anticipation of possible shortages.

Empire manufacturing for September is expected to slow though manufacturing production for August is expected to rise 0.4%, up from -0.1% in July.

EURUSD – while we hold above the 1.1820 area the upside momentum remains intact with resistance at the 1.2000 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 – yesterday’s break above the 1.3320/30 level, has seen the pound test the 1.3400 level and 100 week MA. A close above here could well prompt further gains towards the 1.3550 area. Support now comes in at the 1.3320 area as well as the 1.3225 area.

EURGBP – broke below the 0.8980 area and have quickly fallen towards the 100 day MA at 0.8845. A break below suggests the potential for further losses 0.8750 and the 200 day MA. We now have resistance back at the 0.8980 area with the prospect of parity a diminishing prospect for the moment. 

USDJPY – failed at the 111.00 area again before sliding back. A break above the 111.00 area retargets the 112.00 area. While below the 111.00 area we remain range bound with support at 109.80 and 109.20.

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