While US markets closed higher yesterday, European markets didn’t react anywhere near as well with the German DAX in particular taking a tumble along with the FTSE100 as weak commodity prices and a pretty shocking US Empire manufacturing report for August weighed heavily on these two particular benchmarks. The Empire manufacturing survey was the worst number since 2009, pointing to a sector in trouble, with new orders negative and shipments negative as well. With the DAX having a heavily industrial component and the FTSE100 heavily geared to basic resources, these sectors weighed on sentiment, while other European indices did slightly better, as uncertainty about global growth prospects, and the likelihood of a possible Fed rate hike next month keeps markets on edge. With commodity prices remaining weak and US oil prices trading at six year lows the focus this week, starting today will be on the latest inflation numbers coming from the UK and the US, with the latest UK CPI inflation numbers due out later this morning. The recent decision by the Bank of England to leave interest rates unchanged has been well documented with the break of consensus by Ian McCafferty voting for a rise in rates, at the most recent meeting coming as somewhat of a surprise, given recent comments from his colleague Martin Weale in June, about a tightening labour market. The expectation had been for a 7-2 split and the fact that there was only one vote for a rate rise was unexpected to say the least. It is still not completely clear why Mr Weale felt compelled to pull in his hawkish claws, but it caught the market slightly off balance and weakened the pound in the process, though the recent 25% slide in oil prices may well have played a part. It now appears that another potential hawk may have broken cover yesterday in the form of Kristin Forbes, who in a rather colourful fashion yesterday argued that low rates for a long time could well give the UK economy a nasty dose of sunburn. She went on to warn about low interest rates causing distortions, without being overly specific about what those distortions might be, though one suspects it may have something to do with the how wages and inflation have swapped roles in a very short space of time. Since June last year this relationship has gone from -2% to 2.4%, a pretty rapid turnaround, which if sustained could well signal inflationary pressures further down the line. Some would argue that having seen wages lag inflation for over 6 years since mid-2008, the Bank shouldn’t be in any rush to raise rates against this backdrop, however the speed of the turnaround could well worry some policymakers, particularly if wage growth continues to push further away from the CPI target rate, and in the process create a wage/price spiral. It still remains unlikely that we will see a rate rise this year, but nonetheless Ms Forbes comments do appear to be leaning towards the hawk camp, particularly if the gap between wages and inflation continues to widen. Even so with respect to today’s CPI numbers it is unlikely that we will see any significant rise in price pressures given the sharp falls in commodity prices last month, with the monthly CPI number expected to show a decline of about 0.3%, while the year on year number is expected to remain unchanged at 0%, though it wouldn’t be a big surprise if we slipped into negative territory here again as well. Retail prices are also expected to come in at 0.9%, and core CPI prices at 0.8%. In Europe, while the latest Greece bailout could well get approved by the various European parliaments with Germany due to vote on it tomorrow, the prospect of new elections in Greece could well be a possible outcome as the Syriza government continues to tear itself apart, while some of the opposition have said they would vote against the Greek Prime Minister if he calls a confidence vote, which seems likely if Syriza defections take his vote count below the 120 seats required to secure his majority. This could be a problem, as is the role of the IMF in any new bailout program which continues to insist on debt relief and whose role in the whole shemozzle could remain unresolved until October, which means that German politicians will be voting on the basis that the IMF may not participate, if things go pear shaped between now and then. In the US the focus returns to the housing market with the latest housing starts and building permits data for July. EURUSD – after last weeks failed attempt to break through the July highs at 1.1200 the euro has slipped back below the 50 day MA and could well slip back towards the 1.1020 area. We need a move through 1.1230 to retarget a move towards 1.1450. For now we seem to be stuck on a 1.0800/1.1200 range. GBPUSD – the pound continues to sit in a 220 point range between 1.5460 and 1.5680, but the bias does appear to be shifting towards a move higher. For now the high of the last five weeks at the 1.5680 level remains a key resistance on the upside, with interim support at 1.5530. A move above 1.5700 has the potential to retarget the 1.5820 level. EURGBP – the 0.7120 level is a key pivot. While below we could see a steeper decline towards the 0.7040 level. Key resistance remains at the 0.7200 area and trend line resistance from the May highs at 0.7480. USDJPY – another failure above the 125.00 level last week suggests we remain vulnerable to a drift lower, with support at the 123.75 area, and then 123.00. Only above 125.90 argues for a move towards 127.20. 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.