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  •  A weak ISM could give the Fed cold feet
  •  USDJPY at a crossroads
  •  Are lead indicators giving us a signal?
  •  The core start to drag Europe lower
  •  One to Watch: Brent crude oil

USDJPY is in focus as we wait for Bernanke and co. to emerge from their latest two day meeting. The disappointing ISM manufacturing data that remained in contraction territory for the second straight month makes the outcome of the Fed meeting slightly less certain; however we continue to think that the Fed will hold fire from adding more QE when it is done with its meeting later today. The economic data has been extremely mixed and the outlook for the US economy remains incredibly cloudy. Although consumer confidence picked up last month, the weakness in the ISM manufacturing survey is worrying. This report still has a fairly strong positive correlation with GDP, which suggests that Q3 got off to a bad start for the US economy after a softening in Q2. The detail of the survey was also fairly weak: new orders remain below 50 at 48, the back log of orders is also negative and contracted further compared with June, the employment index remains above 50 but fell to 52.0 from 56. 6 in June.

Being a Fed member is no easy ride these days. Not only do you have to accept that your policy tools are having a limited effect on the economy, you can't stand idly by when unemployment remains this high. The Fed could pump more liquidity into the economy, but it may invoke the ire of the Republicans in an election year, which the Fed may try to avoid. It could do nothing, causing the dollar to rise, which may hurt the extremely fragile economic recovery. Instead we think it could acknowledge the uneven recovery and persistent weakness in employment and reinforce its commitment to keep interest rates at extremely low levels for a prolonged period, possibly beyond 2014, however we think it is more likely that the Fed will wait until it releases its next set of rate projections at its September meeting.

US Treasury yields are rising today as we wait for the Fed at 1915BST/ 1415 ET, which has helped to boost USDJPY. This cross has been stuck in a 30 pip range for the last two days. When trading ranges narrow this much it tends to be the calm before the storm, and eventually the pair may break out to one side or the other. If the Fed does the bare minimum at this meeting as we expect then we may see a reversal back towards 79.20 - the Tenkan line on the weekly cloud, and a key resistance zone, ahead of a re-test of 80.50 - the top of the Ichimoku cloud, above here is the start of a technical uptrend. Of course, if the Fed does surprise us and announce another round of QE we may see further weakness. 77.30 is key support - the base of the weekly Ichimoku cloud. Either way, expect volatility in this pair as once the FOMC is out of the way the market will focus on the NFP on Friday.

Of course it's not just the FOMC we need to be mindful of; we also have the ECB and BOE tomorrow, so watch out for our preview released later today. After Draghi's speech last week, the market is expecting a lot from the ECB. EURUSD has been fairly static today and managed to, more or less, keep hold of the 1.23 handle and stocks have been fairly well supported all week. In contrast we are seeing signs of weakness in some of the leading market indicators including the CRY commodity index, the Nasdaq and the Russell. These markets tend to be sold off before other markets as they are particularly sensitive to risk, thus they may be selling off in anticipation of a disappointment from the ECB tomorrow.

Economic data in Europe was disappointing. The manufacturing PMI's were particularly weak for France and Germany, interestingly Spain and Ireland saw their PMI results for July start to rise. In fact Ireland is racing ahead with a PMI reading of 53.9! So is core of Europe starting to catch up with the periphery in the growth stakes? If yes, that is not good for growth for the currency bloc and suggests that the ECB has room to loosen policy further.

Data watch:

Ones to Watch:

Could Brent crude oil be in for a fall? The overall commodity index is lower, while Brent has moved higher. This is unusual as the Brent price tends to track the Thomson Reuters/ Jefferies index closely, thus this mis-match is worth looking at closely.

If the FOMC does as we expect and does not deliver more stimulus to the US economy, if the ECB disappoints the market then we could see a decline in Brent crude. The levels on the downside to watch include $103.20 then $100.25 - the 50-day moving average and a key support zone. Resistance remains at $106.60 - the recent cluster of tops that have thwarted the bulls in the last few weeks.

UK Oil: daily chart



CRY Thomson Reuters/ Jefferies Commodity index: daily chart


Source: Bloomberg - please note that this is not a product offered by

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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