A lacklustre finish for US markets as they returned from their long weekend saw them finish in the green, but it was a struggle as concerns over Syria constrained any upward momentum, while the strong finish seen in European markets on Monday soon gave way to similar caution ahead of some key economic events later this week. On Monday we saw a strong rally in Europe’s markets on the back of some encouraging manufacturing data from Italy and Spain which saw both sectors return to expansion for the first time since 2011, while Germany also posted a similarly positive reading. This data improvement has buoyed optimism that the worst of the European recession could well be in the rear view mirror. This optimism does need to be tempered though and today’s services PMI for August could well do just that simply because, of the two sectors it has proved to be the least resilient, when it comes to the recent recovery. While Germany is once again expected to be the outlier, with expectations of a 52.4 reading the remaining numbers for Spain, Italy and France are still expected to come in the wrong side of 50. Expectations are for Spain to come in at 49.5, Italy 49.9 and France 47.7, with the broader euro area measure expected to come in at 51. A little later the final reading of Eurozone Q2 GDP is expected to be confirmed at 0.3%, while July retail sales are expected to show a rise of 0.2%, up from June’s sharp 0.5% decline. The UK economy on the other hand appears to be showing no sign of holding back as economic activity continues to rebound strongly. In July both manufacturing and construction sectors exploded out of the blocks with strong readings, and this week’s August readings built on that surge with strong growth in both. This strong recovery prompted the OECD yesterday to revise higher its growth target for the UK economy from 0.8% to 1.5% for this year, quite a turnaround from earlier this year when all the talk was of a triple dip recession. If today’s services PMI reading for August follows the recent script and also beats expectations then Mr Carney is going to have to tread a very tricky line in trying to anchor his policy of forward guidance to the irrational exuberance surrounding the recent improvement in economic conditions. Oh to be a fly on the wall at tomorrow’s MPC meeting. If Martin Weale had his doubts about the forward guidance policy a month ago, what must he be thinking now? July’s services PMI reading was 60.2, and the last time the sector recorded a reading that high was in January 2007. Expectations are for a number around 59.8, but if we come in above that then we could well see the pound have another crack at the 1.5700 area, and gilt yields head towards the 3% mark. In the US the only data of note is the July trade data, with the ADP employment data delayed until tomorrow, due to the holiday on Monday. The recent upgrade in US Q2 GDP data was driven by a significant improvement in US trade data over the quarter, with the June numbers coming in with a $34.2bn deficit, This is expected to widen out again in July, but only to -$38.6bn, reflecting the slow down seen in the recent data over the last tow months. Later in the evening the Fed releases its “Beige Book” which outlines the economic activity in the various Fed regions, and it is likely to paint a patchy picture of an uneven recovery and likely keep markets guessing as to the timing of any tapering program. EURUSD – the euro is currently finding support where we have the 100 and 200 day MA at 1.3140. This remains a key support area and the main obstacle to a move lower towards the 1.3000 area and the lows this year at 1.2750. Only a move back above 1.3310 argues for retest back towards the 1.3410 area. GBPUSD – the pound continues to remain remarkably resilient and while above last weeks low at 1.5440 and trend line support at 1.5480 from the 1.4815 lows, should remain so. We had another go at the 1.5600 area yesterday and this remains the barrier to a retest of the highs at 1.5715 last month. Only below the 1.5400 level argues for a sharper move towards 1.5340, and then 1.5260. EURGBP – yesterday’s break below the 200 day MA for the first time this year shifts the bias to the downside on the euro towards the 0.8395 April lows. Pullbacks should find some selling interest at around the 0.8485/90 area initially USDJPY – we’ve seen a move just shy of the 100 level so far, but this week’s break above the cloud resistance at the 98.80 level and the 98.90 trend line resistance from the May highs at 103.75 still points to the possibility of a test back towards the 100.30 area initially, and then a retest of the highs this year. Only a move back below 98.80 undermines this scenario and argues for a test back towards the 97.00 level. 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. 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