Inflationary pressures are likely to be back in the spotlight later this morning with the release of the UK August inflation data after a surprise rise in prices in July.
The Bank of England monetary policy committee has been at great pains recently to impress upon markets that the fall in inflation over the last few months is sustainable, however the surprise jump in the July number has raised concerns about the accuracy of this expectation.
Given the Bank of England’s recent forecasting record on inflation over the past few years markets would not be unduly surprised if they were wrong again, and the recent sharp 25% rise in oil prices since June, has raised doubts. In August alone Brent prices rose 9%.
Last week’s undertaking by the Federal Reserve to boost its asset purchase program is unlikely to help ease price pressures, even allowing for last night’s sudden drop in crude prices in New York, which slid sharply due to nervousness about a possible SPR release.
In any case inflationary pressure could well start to build up despite economist expectations of an annualised fall back in the CPI measure from 2.6% to 2.5%. The month on month figure is expected to show a rise of 0.5%, while the RPI measure is also expected to show a monthly rise of 0.5%, which translates to a 3.1% rise year on year.
If inflation is to fall back then it is likely to be due to discounting by retailers to offset a drop off in trade caused by decreased footfall as a result of the Olympics, as consumers stayed at home.
Back in Europe it would appear that the Spanish government is doing its best to throw away the time bought for itself by the ECB’s pledge to buy peripheral bonds.
The reluctance of the Spanish government to ask for a bailout is understandable given the political pressure domestically in the face of mounting opposition to further austerity.
The resultant fall in bond yields is also helping in that respect but there is a sense, that they are merely delaying the inevitable.
As on so many previous occasions throughout Europe’s crisis, when the pressure on yields is removed, so is the pressure on politicians to act.
Spanish 10 year bond yields as a result have nudged back up towards 6% while yields at the shorter end have also moved higher.
Later in the morning we could well see a recovery in German ZEW economic sentiment for September, which is expected to recover from 8 month lows. It will also be the first reading since the ECB’s detailed outline of how it intends to save the euro. If that doesn’t prompt a rebound in confidence in the German business community, nothing will, with the September number expected to improve from -25.5 to -20.
EURUSD – yesterday’s failure to move much beyond Friday’s high at 1.3170 could prompt a pullback towards the 1.3000 level and trend line support from the September lows at 1.2500.
The key resistance on the upside remains at 1.3240, trend line resistance from the 1.4940 highs of 2011. A move above 1.3240, targets 1.3495, the 50% retracement of the entire down move from 1.4940 to 1.2045.
A move below 1.3000, it could well see a move back to the 200 day MA at 1.2830 with only a close back below the 200 day MA suggesting a move back towards 1.2650.
Key trend line support from the 1.2045 lows now lies at quite some way back at 1.2550.
GBPUSD – the highs this year at 1.6305 remain a key level and a major obstacle to 1.6590, last years August highs. We could well see a pullback towards 1.6050, while below that we have trend line support at 1.5920 from the August lows at 1.5490.
Only a break below 1.5860 has the potential to target 28th August lows at 1.5755. The long term trend line support lies at 1.5605 from the 1.5240 lows.
EURGBP – a lower high yesterday which suggests we could see a drift back towards the 0.8000 level after the failure to get close to the 200 day MA at 0.8140. This remains the major obstacle to further gains. We now have minor support at the 0.8000 level, while a move below the 0.7950 level suggests a move towards the 0.7880 level.
USDJPY – rising tensions between China and Japan have sent the yen lower towards trend line resistance at 79.15 from the 20 April highs at 81.80. The 200 day MA at 79.31 remains the main obstacle to a return towards the highs last month. Any pullbacks should find support around the 78.20 level as markets look to create a base.