Europe to open higher despite weak China data

While markets in Europe were able to close last week in broadly positive territory it was a rather hollow victory given that they closed well below their highest levels of the week, on a range of concerns about what the Federal Reserve might do at its long awaited rate meeting later this week. Further positive labour market data last week along with a divided FOMC has had the effect of making this week’s Federal Reserve decision a key signpost with respect to the next move in not only equity markets, but the US dollar as well. To muddy the waters further we saw a sharp drop in Michigan consumer confidence for September on Friday to its lowest levels in 12 months which might suggest US consumers could be starting to become less confident as the prospect of a rate rise looms into view. A number of Fed officials have also come out with varying views on their position on a possible rate move in recent weeks, making this week’s decision about as finely balanced a decision as there has been in nearly a decade. While 2 year treasury yields continue to price in some form of action sometime in the near future, Fed fund futures put the prospect of action this week at around 30%, and it is this bi-polarity that is sowing such seeds of uncertainty in market price action in recent weeks. With investors still unsure about what is going on with respect to the Chinese economy after last week’s much weaker than expected inflation data, there is still an expectation that Chinese authorities will have to take further steps to ease monetary policy further in the coming weeks, and it is this, along with a weaker Chinese currency, that is fuelling concerns that we could see China export further deflationary price pressures into the global economy in the coming months. The latest Chinese data over the weekend hasn’t done anything to alleviate those concerns with the release of August industrial production and retail sales data, though it did improve on the numbers in July. Industrial production showed an improvement on the July data coming in at 6.1%, but it was below expectations of 6.3%. Retail sales were slightly more encouraging, coming in at 10.8%, the best performance this year, and above expectations of 10.6%. What was more concerning was the fall in fixed asset investment to 10.9%, below last month’s 11.2%, and it is this along with a weak manufacturing sector that suggests that the wish of the Chinese government hitting its 7% growth target is likely to be the product of wishful thinking, unless data improves substantially between now and year end. The only data of note out today is the latest EU industrial production data for July which is expected to show a recovery to 0.3% from the decline of 0.4% seen in June. EURUSD – the euro continues to inch back towards the 1.1400 level with a strong finish last week. Now back above the 200 day MA the 1.1280 level should act as interim support, with the larger support level at the 100 day MA just above 1.1100. A move through 1.1400 retargets the 1.1700 highs seen in August. GBPUSD – having hit a peak of 1.5475 last week the pound is now back above the 200 day MA at 1.5350. To push on towards and beyond 1.5530 we need to hold above the 1.5330 area. Only a move below the 1.5170 tweezer lows argues for a test of the May lows at 1.5080. EURGBP – appears to be building for a break higher, with a move through 0.7400 potentially targeting a move to 0.7500. Last weeks close above the 200 day MA at 0.7325 has the potential to be fairly bullish. Below 0.7230 suggests a return to 0.7180. USDJPY – a bit of sideways trading going on here, with key resistance at 121.75. The US dollar still looks vulnerable to a return to the 116.20 area seen a couple of weeks ago, but for now appears to be range trading between 118.50 and 121.50. 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.