The volatility in European markets continued yesterday with markets opening lower for the second day in succession before closing marginally higher as some investors looked to pick up some stocks on the cheap. The rebounds continue to remain tepid though, and this probably underscores an underlying concern about the overall economic outlook heading into year-end, which was underlined by another poor German economic number yesterday, and some weak Chinese inflation data earlier this morning which showed inflationary pressures slowing again with CPI coming in at 1.6%, well below expectations, and its weakest reading since early 2010. The ZEW sentiment survey hit its lowest level since November 2012, coming in at -3.9, while the German government also downgraded its growth forecasts for 2014 and 2015, an almost inevitable consequence of last week’s similar downgrades by the IMF and OECD. This downgrade could be seen in some circles as a catalyst for the German authorities to soften its stance with respect to further stimulus measures, but this remains highly unlikely given rising opposition in Germany to the measures already being undertaken by the ECB. As things stand with the Federal Reserve set to end its bond buying program at the end of this month, there appears little prospect this year that the ECB would be able to fill the gap left by the Fed even if it wanted to. This is important particularly in light of the regular disagreements that we are seeing being played out between the Bundesbank’s Jens Weidmann, and ECB President Mario Draghi, as well as rising political opposition in Germany to further monetary easing. With the European Court of Justice deferring any announcement on the ECB OMT case until January 14th next year the prospects of the ECB acting beyond the measures already announced, remain slim ahead of that date. Today’s final German CPI numbers for September are expected to be confirmed at 0.8%, while markets should be aware that ECB President Mario Draghi will be making a speech in Frankfurt at 8am London time. With all of these factors in mind, against a backdrop of deteriorating economic data it will remain difficult for stocks to rally meaningfully, unless earnings and guidance expectations come in above consensus, not only in the US, but also in Europe as well. That isn’t to say that interest rates won’t remain low, because they probably will due to the slides seen in commodity prices, which are likely to feed into good news for consumers in the form of lower energy prices. The recent sharp slide in oil prices is excellent news from that point of view in that it will keep interest rate rise expectations pretty much anchored, with UK inflation hitting its lowest level in ten years yesterday at 1.2%. Any prospect of a UK rate hike this year had already been a remote prospect even before yesterday’s inflation numbers, but the weak reading yesterday may well have also killed the likelihood of a rate hike before next year’s election as well. The sharp falls in inflation are also helping to ease the cost of living crisis somewhat with today’s average earnings data for August set to show a slight rise from 0.6% to 0.7%. The ILO unemployment data for August is also set to continue to show a decline from 6.2% to 6.1%, while monthly jobless claims look set to post another 30k fall in September, with a decline of 35k expected, the 22nd month in succession that claims have shown a fall. In the US the latest retail sales data for September is expected to show a decline of 0.1%, while the latest Fed Beige Book is expected to add some further colour to the strength of the underlying US economy. EURUSD – the euro appears to be struggling to overcome the 1.2785/90 area which it needs to overcome to target a move towards 1.2900. While below 1.2790 the risk remains for a retest of the 1.2570 level. Below 1.2570 argues for a retest of the 1.2500 level and then 1.2400. GBPUSD – yesterday’s break below the previous lows at 1.5950 opens up the possibility of a test down to the 1.5720 area, which is the 61.8% retracement of the 1.4810/1.7192 up move. The pound is still likely to be susceptible to rallies back towards 1.6020 but the bias remains for a move lower. Only above 1.6020 argues for a move back towards 1.6200. EURGBP – as suspected the euro pushed up towards the 0.7930 level and also pushed through it and now looks set to test upwards towards the 0.8000 level. Having broken above the 0.7900 level any pullbacks could well find support at this level as well as the 0.7920 area. USDJPY – the bias remains for a move the 106.20 level after last week’s bearish weekly candle. This remains the first stop on the way for a move towards a potential decline towards the 105.60. We need to stay below the 108.50 level for this move to unfold. 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.