US markets returned from their long weekend yesterday with the S&P500 making another new intraday all-time high, helped in no small part by a continued improvement in economic data, but once again caution seems to be the overriding sentiment as markets once again closed back near their opening levels, having made little progress on the day. This caution over better economic data and the end of stimulus next month, is probably starting to concentrate minds as the prospect of higher rates gets ever closer. It is certainly getting reflected in the performance of the US dollar and the rise in US bond yields and it is probably this new dynamic that is starting to come into view, with every significant improvement in the economy. While optimism remains high that the US economy is improving it remains pretty thin elsewhere on the ground with concerns about the Chinese economy, as well as weakening economic data in Europe, with Ukraine concerns also acting as a drag. The puzzle remains as to why investors seem so unruffled by what is happening in Ukraine and the potential for further escalations, as well as any ripple out effects. Having seen weak manufacturing data earlier this week the focus now turns to the European services sector today, and while these numbers have generally been better across the board, here too, the direction of travel has been a slow weakening of the numbers, compared to previous months. This morning Chinese services PMI for August came in at 54.4, while the more reliable HSBC measure came in at 54.2, a surprise rise from the previous month, and this looks set to give us a positive start this morning, even if it probably won’t be a flavour of what to expect this morning from Europe. With all eyes on tomorrows ECB rate meeting and the weak manufacturing numbers earlier this week, markets will be hoping for better numbers from the services sector this morning, with the latest PMI numbers from Spain, Italy, France and Germany due out. As is the case in China, these numbers have generally performed better than the manufacturing sector in recent months, but they have also started to weaken from their peaks a few months ago, and similar weakness will once again shift the focus back to tomorrow’s rate meeting, especially if any of them slip in contraction. Expectations are for Spain to come in at 55.5 , Italy at 52, France at 51.1 and Germany at 56.4. in a further sign of weakening economic activity EU retail sales for July are expected to decline 0.3%, down from the 0.4% rise seen in June. In the UK the pound took a bit of a swan dive yesterday despite a much better than expected construction PMI number for August, with some speculating that the pound may be suffering a little bit of a vertigo as a result of the narrowing polls in the Scottish referendum. While that may be partly true the decline can also be put down to a stronger US dollar, and euro short covering ahead of tomorrow’s ECB rate meeting. Today’s services PMI number for August could well give it another nudge lower particularly if it disappoints in the same way as Monday’s manufacturing number did. Expectations are for a decline to 58.5 from 59.1 in July. The main focus for US markets today is likely to be the Fed’s Beige Book as the central bank updates its forecasts for economic growth through the twelve different Fed regions. EURUSD – the euro continues to track lower closing in on levels last seen last September at 1.3105. A break below these lows then brings the 1.3020 level into view. This remains a key support being that it is a 50% retracement of the move from the 2012 lows at 1.2042 to the 1.3993 highs earlier this year. On the upside the euro needs to push back through the 1.3230 level and fill the gap from 22nd August to stabilise. GBPUSD – the failure to push beyond 1.6640 this week has seen the pound break lower through 1.6520 and we now look set for a move towards 1.6460 and the lows in March initially. A break through here has the potential to target the lows this year at 1.6250. Trend line resistance from the July highs comes in at 1.6620. EURGBP - the euro appears to be holding above the July lows at 0.7875 for now and this remains the main obstacle to a move towards the 0.7785 level, and July 2012 lows. We could still see a move back towards the 0.8000 level in the short term, but overall the trend remains lower, while below 0.8000 trend line resistance from the August highs. USDJPY - the US dollar continues to close in on the highs this year at 105.50/60. While above the 103.50 area the risk remains for a move towards 105.50. This remains a huge level given it was the recent high from the end of last year, as well as the 61.8% Fibonacci retracement of the decline from the 2007 highs at 124.13 to the lows 75.58 in 2011. CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.