What a difference a few days makes, as well as a slight change of tone from both China as well as the US.

The decision by China to hold back on any retaliation in response to last week’s US decision to increase tariffs, appears to, for now, have prompted a cautious rebound in equity markets. The more measured tone in deciding to focus on next month’s meeting to discuss removing the extra duties has seen some optimism start to creep back in.

Even bond markets, which have a tendency to be slightly more sceptical, saw a little bit of a sell off, along with gold prices and other haven assets, as yields edged higher, though this could also be as a result of some end of month tidying up of positions ahead of the US long Labour day weekend.

In any event the S&P500 closed back near to the top end of its recent range with key resistance up near the 2,945 level.

It was also a good day for European markets, with the additional bonus of relief that the prospect of new elections in Italy had subsided, at least in the short term, after President Matterella tasked Giuseppe Conte with the job of forming a new government.

While it would appear that we look set for a decent week of gains for equity markets in general, there’s always that nagging doubt that we’re only a Presidential tweet away from another sharp sell-off and for all of the gains of the last few days, and what appears to be a fragile truce, the fact remains that tariff barriers will increase further on the 1st September, increasing the costs of doing business for companies worldwide.

On the data front, yesterday’s weak inflation data out of Germany fed into a narrative, that the European Central Bank was more likely than not to embark on further easing when it meets next month.

In fact, expectations have been built up so much, that markets have already priced in that the bank is likely to embark on a significant rate reduction, as well as signalling a new ambitious stimulus plan. Earlier this month Bank of Finland Governor Olli Rehn hinted that the ECB needed to overdeliver on market expectations when it meets on September 12th.

Sadly, it appears that no one appeared to have told Netherlands ECB governor Klaas Knot, when he said that euro area economy isn’t weak enough yet to warrant further stimulus measures, though he did say he would support a rate cut. He’s not alone in thinking this either, with a number of other hawkish ECB policymakers also offering up their one- or two-euros worth in recent days, including Ewald Nowotny of the Austrian Central Bank, who said this week the bank should be prepared to disappoint the market, if it felt it was necessary. Jens Weidmann of the Bundesbank is also not a fan of QE, so there is a risk that having over promised the ECB may well under deliver when it meets next month.

Of course, economic data between now and then might well shift the calculus in that regard, however it is clear that any decision next month to ease next month may well be contentious in terms of the size and scale of the measures taken.

Today’s flash EU CPI numbers for August could be one of those measures, with an expectation that the headline and core rates are likely to both come in at 1%, however if either or both slip back below 1% the calls to act decisively will once again return to the fore.

German retail sales for July are also expected to be released before that and are expected to decline by 1.4%, which would reinforce concerns about a contraction in economic activity for Q3 GDP.

It’s also likely to be an important day for the pound with a series of court challenges scheduled on the legality of the government’s decision to schedule the suspension of parliament, on the basis that it the decision was unconstitutional. There is a ruling scheduled later this morning in Edinburgh.

It would be unusual and highly contentious if the court were to find against the government, however in times like these it’s wise to never rule anything out.

EURUSD – continues to look soft as we look to retest the lows at 1.1020, and on towards the 1.0800 area. Key resistance sits at the 50-day MA at 1.1200 as well as the 1.1250 area.

GBPUSD – could slip back towards the recent lows at 1.2015 having failed to hold above the 1.2200 area. Short term resistance comes in at 1.2230, and beyond that at the 1.2300 area. We also have major support sitting at the 1.1980 area.

EURGBP – the 0.9015 lows are now a key support area, with a break below the 0.9000 area targeting a move towards the 0.8920 area. We need to push back above the 0.9180 area to argue a short-term base is in. The weekly reversal from a couple of weeks ago still remains valid while below 0.9180.

USDJPY – needs to move above the 107.00 area to argue for further gains towards 108.20. While below here the risk remains for a move back towards the lows this week at 104.45. A move below 104.30 opens up the prospect of further losses towards 101.20. 

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