Over the past week we’ve had a Chinese rate cut, an ECB who have hinted that they will do more, and the US Fed who appear to be itching to pull the trigger on a rate rise by the end of the year. The Bank of Japan also weighed in this morning, though contrary to some expectations they decided to leave monetary policy unchanged on the basis of some recent improvements in the latest economic data. Whether that last action comes to pass is still open to question given yesterday’s sharp drop in US Q3 GDP to 1.5%. More importantly core Q3 PCE price inflation also dropped sharply from 1.9% to 1.3%, suggesting that fears over inflation were likely to remain subdued. We have more US data later this afternoon with the release of the latest monthly PCE inflation data for September, as well as personal spending and income data, Chicago manufacturing PMI and the Q3 Employment cost index. All of these measures have fairly low expectations attached to them with the Fed’s preferred measure of inflation (PCE) set to come in at 0.2%, on the month and 1.4% year on year. Personal spending and income are also expected to rise 0.2%, both down from August’s numbers, while Chicago manufacturing PMI is expected to show a contraction for the second month in succession at 49.5. The employment cost index is expected to show a rise of 0.6%, up from the weak 0.2% rise seen in Q2, however given the weak Q3 GDP reading seen yesterday, this does seem rather optimistic. Despite on/off concerns about a Fed rate rise US markets still look set to post their best monthly performance in four years, reversing most of the declines seen in August and September, as investors veer between confidence that the US economy is still performing well enough to withstand a rate rise, to an expectation that if it’s not, the Fed will remain on hold. It’s also been a strongly positive month for European equities, even if not on the same scale as the US as a continued expectation of easier central bank policy has helped underpin equity markets after a turbulent few months. As we come to the end of October, and this week, investors will no doubt be doing some month end book squaring, while at the same time getting a fresh snap shot of the health of the European labour market, as well as the latest CPI inflation data. Over the past few months we’ve seen some sharp falls in unemployment numbers across Europe, Italian unemployment was over 13% at the beginning of this year, while EU unemployment was at 11.5%. Both measures have seen significant drops in the last few months with Italian unemployment for September set to come in at 11.9%, unchanged from August, with EU unemployment set to come in at 11%. While welcome these falls are nowhere near fast enough to make a significant difference to the bloc’s growth prospects, hence the continued dovishness of the ECB. Today’s latest EU CPI figure for October is expected to show a slight improvement from -0.1% to 0%, with core CPI expected to remain unchanged at 0.9%. EURUSD – we’ve found a short term base around the 1.0900 area, with the main support down at the May and July lows at 1.0820. We need to see a recovery back through 1.1115 to stabilise the current downward momentum. GBPUSD – while we remain above the 1.5205 trend line support from the 1.4565 lows the uptrend that has been in place since April could well remain intact. We got a daily bullish candle yesterday suggesting pound could well see a rebound back towards 1.5420 and 1.5510. EURGBP – continues to find support at 0.7145, 61.8 Fib retracement of the up move from 0.6935 to the highs this month at 0.7495. A move through 0.7145 has the potential to open up a larger move towards 0.7075. USDJPY – this week’s rebound has seen the US dollar pull back but the September highs above 121.70 continue to act as strong resistance. Above 122.00 could suggest a return to the 124.00 area. We have support at the 120.20/30 area, with a break retargeting the 119.20 area. CMC Markets is an execution only service 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.
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