For a nice change of pace, the euro dominated the headlines yesterday. 

There wasn’t a huge amount to report from the European Central Bank update as rates and the stimulus package was kept on hold – in line with forecasts.

Policy makers at the central bank said there was no need to over react to the strength of the single currency. Thanks to the extremely aggressive monetary easing policy from the Fed, and uncertainty in relation to the UK’s future trading relationship with the EU, the euro has been pushed up.

The August headline CPI figure for the eurozone was -0.2%, the lowest in four years. The ECB predicts that headline CPI will remain negative for a few months and then turn positive in 2021. The latest services and manufacturing data from the currency bloc points to a cooling in the recovery, so the firmer euro will probably impact the rebound. This year the CPI rate is expected to be 0.3%, unchanged from its previous forecast, while the new 2021 forecast is 1%, up from 0.8%. The economy is now expected to shrink by 8% in 2020, while the previous forecast was -8.7%.

ECB probably don’t like the strength of the euro, but it seems as if they have no desire to go head to head with the Fed and try and drive in down, so it appears they are content to play the wait and see game.

Speaking of games, the continued uncertainty surrounding the UK-EU trade situation hit the pound hard yesterday. Should the UK wind up trading with the EU on basic WTO terms in 2021, it is likely to hit both sides, but traders are taking the view that the UK would come off worse in such an outcome. David Frost, the UK’s chief negotiator, said that challenges remain, but the team is committed to trying to reach a deal by mid-October. The fear that a compromise will not be reached in roughly five weeks is weighing on sterling.  

Volatility in equity markets was low by recent standards. Stocks in Europe were largely positive with approximately one hour to go before the end of the session, but US indices moved into the red, so that weighed on sentiment. European markets ended lower. Things went from bad to worse in the US, as the NASDAQ 100 closed down over 2%, and the S&P 500 ended -1.7%.

The session in Asia is quiet and the major indices are mixed. European markets are called a little lower.

Republicans in the Senate failed to push forward a coronavirus relief package. The lawmakers proposed a bill that would see unemployment benefit being enhancing by $300 per week. The proposed package would have allocated funds to schools and testing facilities, it also would have authorised new loans to small businesses. The Democrats are holding out for a more generous package. The bill failed but it should bring about further political wrangling   

The US jobless claims reading was 884,000, and the previous report was revised from 881,000 to 884,000. Economists were expecting 846,000, so it was a disappointment on that front. It is clear the rate of new people signing up for unemployment benefit is tapering-off. The headline PPI for August was -0.2%, and that was an improvement on the -0.4% registered in July. The improvement in the reading could be a sign that inflation might move higher – something the Fed would embrace.

The dollar index saw a lot of volatility yesterday. It was in the red for much of the day on account of the rally in the euro, but it managed to turn positive in the evening. The uptrend in the dollar that started last week is still intact. On several occasions in the past month, the dollar has tried to snap out its bearish trend but to no avail.

Gold handed back some of its earlier gains because of the firmer US dollar but in the last few sessions it produced a series of higher highs and higher lows, so the uptrend in still in play.

The oil market came under pressure yesterday. The Energy Information Administration report showed that US oil stockpiles jumped by 1.65 million barrels, which surprised traders as the consensus estimate was for a build of over 2 million barrels. On Wednesday, The American Petroleum Institute report showed that oil inventories rose by 3 million barrels while dealers were expecting a decline of 1.4 million barrels. The reports point to lower demand.

At 7am (UK time), the UK will announce a number of economic reports. The GDP reading for July is expected to be 6.7% on a monthly basis, and keep in mind the June reading was 8.7%. Industrial output, manufacturing output and construction output are expected to be 4%, 5% and 10.5% respectively.

The final reading of German CPI for August will also be posted at 7am (UK time), and it is tipped to be -0.1%.

US CPI will be in focus in light of the fact the Fed said they are changing their inflation target to an average of 2%. The August CPI reading is expected to rise to 1.2%, up from 1%. The core report is anticipated to hold steady at 1.6%.   

EUR/USD – has been in an uptrend since April and if the bullish run continues it should target 1.2000 or 1.2140. A pullback might find support at 1.1696 or at the 1.1600 zone. 

GBP/USD – has been in a downtrend since early September and further losses might encounter support at 1.2738 the 200-day moving average. A rebound might encounter resistance at 1.3035.   

EUR/GBP – hit its highest level since late March and should the rally continue it might target 0.9388. A pullback might find support at 0.9070   

USD/JPY – while it holds below the 100-day moving average at 106.85, the broader bearish move is likely to remain intact. A move through 105.10 could see it target 104.18. A break above 107.00, should bring 107.84, the 200-day moving average, into sight.