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UK wages set to remain strong, while US retail sales set to slow

European markets started the week cautiously higher in the absence of an escalation of tensions over the weekend, although you can be sure that investors will be keeping a wary eye on events in the Middle East as Israel weighs its next move.

US markets followed suit with slightly more enthusiasm and a much stronger session, despite a sharp rise in US 10-year yields, while the US dollar and gold both slipped back.

This resilience continued this morning as Asia markets also pushed higher while markets here in Europe look set for a flat open as investors gear up for a longer lead up time to a possible Gaza incursion and an extended conflict.

Yesterday we heard from Bank of England chief economist Huw Pill who warned that rates would have to remain higher for longer in order to get on top of current inflation trends, reiterating his “Table Mountain” comments from a month ago. These comments are particularly noteworthy as were Bank of England governor Andrew Bailey’s comments in Morocco last week that potential UK economic growth was likely to be weaker at 1.5%, and below the previous trend of 2.25% and 2.5% due to lower business investment trends.

Today’s wages growth data is also likely to continue to cause headaches for the Bank of England going forward given that for the last 2 months it’s been trending at a record high of 7.8%, for the last 2 months, and is likely to remain at this level in today’s August numbers.

With the addition of one-off bonuses, the actual number soared to 8.5% in July, and is only set to slow to 8.3% in today’s August numbers which may spark concerns of another rate hike at the next meeting in November. These concerns seem overstated and really shouldn’t be a problem in the short term given the massive hit to consumer incomes over the past 18-months that has made consumers worse off.

It will take some time for the cumulative effect of the rate hikes of the last few months to be fully felt so the Bank of England will have to exercise patience when it comes to seeing how their monetary medicine has been absorbed by the patient.

This means that rates probably won’t need to rise any further, even though they will need to stay higher for longer with little prospect of a rate cut much before the second half of 2024. The latest ILO unemployment figures have been deferred to next week, and are expected to remain unchanged at 4.3%.

We’ll also be getting an insight into the latest US retail sales numbers for September, which could see a possible downside surprise despite remarkable resilience in recent Q3 numbers. After a slow start to the year US retail spending has got stronger as the year has progressed, driven mainly by a strong labour market and low unemployment.

The rise in gasoline prices may well prompt some slowdown in discretionary spending, however both July and August saw resilient levels of retail sales of 0.5% and 0.6%, with today’s September retail sales figures expected to see a modest slow down to 0.3%. The recent US consumer credit numbers showed that US consumers pulled back spending quite sharply in September, while recent consumer confidence numbers have seen a slowdown, which raises the risk that we might see a downside surprise.      

EUR/USD – has seen a modest rebound from the lows last week at 1.0495, but needs to break through trend line resistance from the July highs, as well as breaking above the 1.0640 level to open up a retest of the 1.0740 area. The main support remains at the October lows at 1.0450, as well as the 1.0400 area which is 50% retracement of the 0.9535/1.1275 up move.  

GBP/USD – saw a modest pullback from last week’s lows at 1.2120 but needs to rise above the 1.2340 area to unlock a move to the 1.2430 area and 200-day SMA. A move below 1.2000 targets the 1.1835 area, 50% retracement of the move from the record lows at 1.0330 to the recent peaks at 1.3145.    

EUR/GBP – still respecting trend line support from the August lows, now at 0.8625 and which is currently intersecting just above at the 50 and 200-day SMA. Resistance at the 200-day SMA at 0.8720 area.  

USD/JPY – continues to find itself capped at the highs this month at 150.16, with a break of 150.30 targeting a move towards 152.20. Below 147.30 signals the top is in and a possible move towards 145.00.

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