It didn’t take too long for the rebound that we’ve seen over the last two to three days to run into trouble, as bond yields rolled over again, and the Italian government fell back into crisis, after Prime Minister Conte resigned, thus opening up the prospect of new elections, and a fresh round of uncertainty over Europe’s third biggest economy.

With Matteo Salvini’s League party currently leading in the polls, the prospect of an improved mandate in a possible October election could well make the relationship between the Italian government and the EU even more fraught, particularly since Italy still has to pass a new budget.

Yesterday’s declines in equity markets were also disappointing against a backdrop of rising pressure on governments to look beyond monetary policy to help kick start a recovery in economic activity. The prospect that the German government might be looking in this area, did help equity markets for a while, but that hope subsided fairly quickly, as bond yields slipped back again. Against this backdrop Germany is expected to auction a €2bn zero coupon 30 year bond at 0% for the first time later today, and the appetite for that could well determine whether the German government is minded to raise further money that way in the coming months. It will also determine whether there is an appetite amongst investors for a bond that offers a zero return, apart from the return of your capital over a thirty year period.

There was also some chatter that the US was considering a reduction in payrolls taxes to help generate a fiscal bump, though that appeared to fall flat when it was denied by White House officials.

Three weeks ago, the Federal Reserve cut interest rates for the first time since 2008, and in minutes due to be released later we’ll get some important colour behind some of the discussions behind that decision.

It was no surprise that we saw two dissents to the actual decision with Esther George of the Kansas City Fed and Eric Rosengren of the Boston Fed dissenting, given the tone of recent commentary from them both. At the time the move was painted as a “mid-cycle adjustment” to the interest rate cycle, with Fed chair Jay Powell pushing back against the notion that this was the beginning of an easing cycle.

He cited concerns about low inflation, as well as weak global growth while asserting that the Fed was only going to be driven by the data.

Since then the market has moved, with bond yields falling further in anticipation of another rate cut, despite a number of Fed officials pushing back against the notion of further easing in the short term.

Today’s minutes are likely to give markets an insight into the discussions over the need for a cut, with St. Louis Fed President James Bullard the main driver behind the decision to move given his dissent in June, when the Fed kept rates on hold.

In particular there is likely to be interest as to whether there was any discussion about whether a cut was even necessary, or more importantly whether an even bigger cut of 50bps was discussed.

Discussions in this area should give an insight into whether there is an appetite for further cuts amongst policymakers, and how they see the US economy. This is especially important at a time when the cries for more cuts are getting louder, particularly from the US President.

The tone of the discussions will also give a steer as to whether markets are right to expect another move in September, though the upcoming payrolls report at the beginning of September is likely to be a key milestone with respect to that determination, as well as this week’s central bank symposium at Jackson Hole Wyoming, where the speech from Fed chair Jay Powell could well offer some key signposting as to whether the Feds reaction function has changed since that July meeting.

The pound has continued to hold up well in recent days, despite the UK government showing no sign of dialling back its pledge to leave the EU at the end of October, whether a deal is in place or not. Some of the buoyancy appears to have been as a consequence of comments by German chancellor Angela Merkel that the EU would consider practical solutions regarding the Irish backstop.

EURUSD – continues to look soft and as such could well slip back to retest the lows at 1.1020, and on towards the 1.0800 area. Key resistance sits at the 50-day MA and the 1.1250 area. We need to overcome the 1.1280 level to retarget the June peaks.

GBPUSD – while above the recent two-year lows at 1.2015, the pound looks vulnerable to a move higher. We still have major support sitting at the 1.1980 area. Needs to move back above the 1.2260 area to prompt further gains back to 1.2380.

EURGBP – a potential weekly reversal after the multi-year high at 0.9325 last week, raises the prospect that the top might be in. The break back below 0.9230, which is now resistance, could well see further losses towards 0.9000.

USDJPY – squeezing back towards the 107.00 area, a break above the 107.20 level could see a move back to the 108.20 area. We still remain vulnerable to a move towards the flash crash lows this year at 104.70, while below 107.20.

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