The prospect of a stronger US dollar, along with some weaker Chinese economic data on Thursday put the skids under European markets yesterday sending them into negative territory for the week.

In an encouraging sign this morning’s Chinese CPI data does appear to show that inflation is gaining traction, with CPI coming in at 1.9%, above expectations. Factory gate prices still remain sluggish, though they have finally made it into positive territory at 0.1%, the first time that has happened since February 2012. Chinese PPi prices have been slowly improving for several months now so this return to positive territory is welcome news, especially so when prices were -5.9% at the beginning of this year. 

While the Chinese inflation data was encouraging the latest Singapore Q3 annualised GDP was not, coming in at 0.6%. On the face of it that number looks good, but it was well short of expectations of 1.7% and the lowest number in nearly 7 years. On a quarterly basis the numbers were even worse, a contraction of 4.1% with manufacturing sliding sharply. As a bellwether for the rest of the Asia region this must be a concern.  

Having made a new record high earlier this week the FTSE100 slipped back sharply, closing below 7,000 for the first time in over a week, as mining and oil and gas stocks got clobbered.

US markets also slid back as well, however they did manage to recover a good proportion of their losses after US oil prices rebounded despite a big build in weekly inventories of over 4m barrels, with the Dow making a one month low in the process. Prices did manage to rebound as traders chose to focus on a larger than expected draws in distillates and gasoline inventories, though a slightly weaker US dollar also helped as it pulled back from this week’s seven month highs.

The late rebound in oil prices and weaker US dollar could well help to see markets in Europe open slightly higher this morning, however the fact remains that the underlying direction for the US dollar remains on an upward track, and this is likely to act as a significant drag on US earnings into the year end, which in turn is likely to make US stock markets particularly vulnerable to further weakness, as a potential rate hike looms into view.

We saw another decent weekly jobless claims number of 246k yesterday, though doubts still persist about the US consumers spending patterns, particularly so close to the upcoming Presidential election. Retail sales for September are expected to improve on August’s disappointing numbers which showed a decline of 0.3%. A rise of 0.6% is expected while producer prices are expected to tick up a notch.

Having gone through this week’s minutes in fairly forensic detail today’s speech by Fed Chair Janet Yellen is likely to be monitored for any changes in tone, particularly since she is giving it at the Boston Fed, whose President, Eric Rosengren dissented from the September vote by voting for a hike in rates. 

The pound had a better day of it yesterday, rising for the second day in succession, despite the controversy around “Marmitegate” as it has been termed. While Tesco and Unilever appear to have reached a mutually agreeable understanding, the spat has brought home the prospect of inflationary pressure building up in the UK economy over the next few months as a result of the falling pound, which means that the Bank of England might well be finally able to hit its inflation target in the coming months. 

On the subject of the Bank of England, MPC member Kristin Forbes and QE dissenter, is set to give a speech later today in Warsaw, where we may get an insight into the central banks thinking about the prospect of further easing this year.

EURUSD –has managed to remain well above the 1.0950 area for now and is pulling back some ground, though it needs to recover back through 1.1100 to stabilise, or risk a test of 1.0950 and potentially 1.0800. Upside resistance remains at the 1.1300 level.

GBPUSD – continues to hold above the 1.2100 level in the last few days, and this needs to hold for a retest of the 1.2500 level. A break below the 1.2000 area has the potential to open up the previous flash crash lows at 1.1950, and possibly lower.

EURGBP – currently trading between the 0.9080 level and support at 0.8960 after last week’s dart up to 0.9300 last week. A move back through 0.8960 could well see a move back towards the 0.8780 level with a break arguing for a move back towards the 0.8720 level.

USDJPY – this week’s push through the September highs stalled at 104.63 before slipping back, before finding some support at the 103.20 area. A break through here could well see a fall back towards the 102.20 area.

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