The pound has managed to hold on to most of the gains of the last few days in the wake of last week's surprise Bank of England about-face on the prospects for a UK rate rise, though governor Mark Carney did try his best to paint a rather bleak picture for the UK economy in his speech to the IMF on Monday. 

The pound has also shrugged off any concerns about the political chicanery at the top of the UK government ahead of prime minister Theresa May’s landmark speech in Florence later this week.

On the subject of the UK economy, it is true that its performance this year has lagged behind the rest of Europe, but it does rather ignore the fact that the UK economy outperformed in 2016, which would suggest that it was probably due a pause anyway. Recent data does appear to be showing signs of holding up fairly well despite last month’s big inflation spike.

Even so there is a risk that this sharp rise in prices could well have hampered retail sales in August, though expectations are for a positive number of 0.2%, after this month’s British Retail Consortium numbers showed a decent improvement on the previous month. This would be slight decrease from July’s 0.3% rise, but it is unlikely to be a cause for too much concern.

US markets continued their record run yesterday as their divergence from markets in Europe continued ahead of today&rsquo s US interest rate decision, shrugging off the aggressive rhetoric of US President Trump towards North Korea at the UN yesterday.

There’s been a great deal of anticipation about this week’s Federal Reserve rate meeting particularly since the FOMC looks set to pull the trigger on the beginning of the paring down of its $4.5trn balance sheet. This doesn’t appear to be in any doubt, nor does the fact that the bank is expected to keep rates unchanged, given that inflation still remains on the weak side, and the damage impact of hurricanes Harvey and Irma continues to be assessed.

The main question surrounds the timing of when the next rate rise is likely to come, and for this there is a school of thought that suggests the market is under-pricing the prospect that we could get one more hike this year, in December.

This is why particular attention is likely to be focused on the dot plot projections of where US policymakers see the potential glide path for rates into next year. It is unlikely that Fed officials will want to take the prospect of a December move off the table, so it would be a surprise to see any changes to the short-term predictions, but there is a whole raft of factors that could delay the prospect of a move in December, and see fewer projected increases into 2018.

Today’s meeting and press conference is also set to be the first time that Fed officials will give their guidance on the impact of hurricanes Harvey and Irma, which could well prompt some caution over the direction of the economic data as we head towards the end of the year.

As such particular attention will be focused on the inflation forecasts which so far have shown little signs of picking up, but also the potential impact on US GDP. We’ve already seen in recent data that retail sales and industrial production have been weaker than expected, and that’s even before the full economic impact has been assessed.

Any caution on the economic outlook is likely to push out the prospect that we could see another rate rise this year, and we shouldn’t forget that the problem of the debt ceiling has been pushed out into December. If that remains unresolved by the time of the December meeting then it makes the prospect of a rate move even less likely.

It is also important to note that several Fed members are due to be replaced in the coming months, including Fed vice chairman Stanley Fischer, who is departing next month, which means that the direction of US interest rate policy has probably never been less certain in terms of the personnel for next year.

Central bank stability gives a degree of certainty to investors however with five new members set to be appointed, the path of policy is likely to be cloudy for some time, until we get more certainty on who will be filling these vacancies.

Currently the bond markets are assigning a 50% probability that the Fed will hike rates again in December, which seems optimistic given the uncertainty around the damage caused by recent storms. This week’s meeting may well shift those odds but it is unlikely to provide the final word.

Forex snapshot

EUR/USD – looking as if we could drift back up to the 1.2090 highs with the potential to test the 1.2170 which is the 50% retracement of the 1.3995/1.0340 down move, but momentum continues to look a little stretched, so the odds still favour a drift back to the 1.1800 area.

GBP/USD – has managed to find some support at the 1.3460 area, but while above the 100 week MA at 1.3400 the bias still remains towards the upside. This weekly close shifts the bias for a potential move to the 1.4000 area. A move below the 1.3400 area retargets the 1.3320 area.

EUR/GBP – has found some support at the 0.8770/80 area, and has managed to claw back some ground above the 0.8860 area. We could well see a short squeeze back to the 0.8980 area. A failure to overcome these levels argues for a return to the 200 day MA at 0.8700.  

USD/JPY – has found some resistance at the top of the cloud just above the 111.70/80 area. If we break through here we could well retest the 112.40 area and 200 day MA. We now have support back down near the 109.80 area.
 

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