Despite all the recent softness in both stock and bond markets in recent days over concern about a more hawkish Federal Reserve the fact remains that a Fed rate rise this month still remains a fairly low 22% probability.

Though yesterday’s decline in European markets may have been a direct result of Friday’s sharp US sell off, today’s higher European open is set to come about as a result of last night’s sharp rebound in US markets after permanent Fed member Lael Brainard reinforced earlier comments from non-voting member, and Minneapolis Fed President Neal Kashkari that there was no rush to move ahead on raising rates, pulling US stocks sharply off their intraday lows.

Inflationary pressure that continues to remain benign, set against a backdrop of slowing ISM data and continued global uncertainty “counsels prudence in the removal of policy accommodation” she warned, as the central bank went into its black out period ahead of next week’s policy meeting.

She also cited concerns about China’s transitioning economy, though this morning’s industrial production and retail sales data for August didn’t throw up too many surprises. Chinese retail sales rose 10.6%, much better than expected, while industrial production ticked higher to 6.3% from 6% in July, in line with the recent improvement seen in the latest PMI’s, as government backed stimulus started to make some returns. Private investment continued to remain weak.

While most of the noise in recent days has come from the more hawkish Fed members the facts remain that both ISM reports for August were much weaker than expected and any Fed move on rates in September would be foolhardy at a time when US growth is trending below 1% for the current year.

Back in UK, in the wake of the recent rebound in the economy shown in the recent August data, the latest inflation data looks set to show a sharp uptick as a result of the recent slide in the pound in the wake of the June Brexit vote.

This could well start to act as a headwind for the UK consumer in the months ahead, and while Bank of England governor Mark Carney may feel “serene” about the Bank of England’s recent and possible future actions, UK consumers may not feel as benevolent towards him or the central bank if the Bank of England’s over reaction to the recent Brexit vote causes price pressures to move sharply higher in the coming months.

It is slowly becoming apparent that far from being a “bomb under the economy”, that Brexit is likely to be a process rather than a sudden shock, and while it is true that no one currently knows what form Brexit will take, there will undoubtedly be both pros and cons to the process in the coming months and years.

Today’s August CPI is expected to show a rise to 0.7% from 0.6% in July and the highest level since December 2014. Core prices are expected to rise to 1.4% from 1.3%, while RPI is expected to slow from 1.9% to 1.8%. Even though these rises still remain fairly modest it is input prices that could well prompt a reaction in the pound as it is here that recent PMI data has shown sharp rises.

If input prices show sharp further increases then it will be increasingly difficult for the Bank of England to remain “serene” with PPI input prices expected to show a sharp rise of 8.2% from 4.3% in July.

EURUSD – continues to hold above the support near the 1.1120 area, to argue for a move back towards 1.1400 and June highs. A move below 1.1120 retargets the low 1.1000’s.

GBPUSD – has found some support around the 1.3230 area and while that holds the risk of a move back towards the highs last week at 1.3450 remains on the cards, with 1.3500 the key resistance. A fall below 1.3200 has the potential to retarget the 1.3000 area. 

EURGBP – currently finding resistance at the 0.8500 area, which argues for the prospect of a move down through the 0.8340 area towards the 0.8200 level.  A move back through 0.8520 is needed to retarget the 0.8600 area.

USDJPY – the line of least resistance remains towards the downside while below the 103.50 area and for a move towards the recent lows around the 99.50 area. The bias remains for a move towards the recent lows at 98.95, and potentially lower towards 95.00, and levels last seen in June 2013.

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