The biggest mover yesterday was GBP; UK CPI continued to be sticky, a print of 1.6% Y/Y was slightly higher than consensus, but the bullish numbers were soon overshadowed by Mervyn King’s dovish comments in his address to the UK Treasury Committee. Sterling was smacked across the board, GBPUSD dropping over two big figures to the 1.64 level on observations that the bank would need to investigate ways to reduce the deposit rate in order to encourage commercial banks to start lending rather than leaving funds on reserve. It seems as though investor expectations will be firmly anchored by his explicit assessment of a weakened outlooked for the UK as rising unemployment and tighter credit conditions provide considerable headwind to recovery. Today’s claimant count data and unemployment figures seem unlikely candidates to revive the GBP rally, both numbers expected to indicate a continued deterioration in the labour market. Meanwhile the German ZEW rose less than expected, with the index of investor sentiment rising to 57.7 versus expectations of 60.0 (56.1 prior). The figures for the Eurozone as a whole also edged higher to 59.6 from 54.9 in the previous month. Across the water, U.S retail sales in August rose by 2.7%, smashing economist predictions of 1.9% M/M. The reading was the highest in three years, as the hugely successful “cash for clunkers” programme boosted motor vehicles 10.6% during the month. Even aside from the gains in autos and gasoline, the clothing, electronics and general merchandise components led to a 0.6% rise in demand which looks tremendously encouraging for a US recovery. Also surprising to the upside was August PPI data, posting a whopping 1.7% increase on the month, more than double economists forecasts. The improved outlook again stoked investor confidence and caused the USD to weaken against most counterparts as the hunt for yield went to the top of the agenda, helping to push EURUSD to its highest levels in 9 months (1.4695). In commodity news, OPEC increased oil forecasts for 2009/10 giving support to crude which climbed back above $70 per barrel, despite higher inventories data from the US. In turn CAD gained some ground against the USD to reach a low just above 1.07, and AUD remained near the highs around 0.86. Gold also posted it’s third daily close above the psychologically important $1000/oz level, ending the day in NY around $1006. Overnight trading pushed prices through the Sep 11 highs at 1011.95, surging above 1016 and likely signalling further upside to come. The data calendar was light overnight but price action was dominated by reports that Japan’s new Finance Minister Hirohisa Fujii saw merits in a strong yen and voiced his opposition to currency market intervention if rate moves were gradual. USDJPY and JPY-crosses were sharply lower, 90.50 the lows so far in USDJPY and 132.95 in EURJPY. Equity markets across Asia were broadly higher overnight and European equity futures point to higher open, no doubt buoyed by the improvement in US data highlighted previously. Data to look forward to today include Eurozone HICP readings for August; this month’s print is expected to post a 0.3% increase, echoing the higher inflation figures we’ve seen in recent days from the UK and US. The US calendar features Aug CPI, Industrial Production and the Sep NAHB housing index. We look for an uptick in CPI of 0.3% M/M, and after the positve Industrial Production figures in July (0.5% M/M), the market is anticipating a futher improvement to 0.7% for Aug.


Today's Key Issues (time in GMT):

07:15 CHF Adjusted real retail sales, % y/y Jul 1.1 0.9
08:30 GBP Claimant count, change K Aug 25.0 24.9
08:30 GBP ILO unemployment rate, % Jul 7.9 7.8
08:30 GBP Average/core earnings growth, % 3m y/y Jul 2.0/2.3 2.5/2.5
09:00 EUR HICP, % m/m (y/y) Aug 0.3 (-0.2) -0.2 'flash'
09:00 EUR HICP ex tobacco, index (2005 = 100) (y/y) Aug 107.84 (-0.35) 107.51 (-0.8)
09:00 EUR ''Eurostat' core (HICP x fd, alc, tob, ene), % m/m (y/y) Aug 0.2 (1.2) -0.6 (1.3)
09:00 EUR ''ECB' core (HICP x unproc.fd, ene), % m/m (y/y) Aug 0.2 (1.1) -0.5 (1.2)
12:30 USD Consumer price index, % m/m (y/y) Aug 0.3 (-1.7) 0.0 (-2.1)
12:30 USD Core CPI, % m/m (y/y) Aug 0.1 (1.4) 0.1 (1.5)
12:30 USD CPI NSA, index Aug 215.9 215.351
12:30 USD Current account balance, $ bn Q2 -92 -101.5
13:00 USD Net long-term TIC flows, $ bn Jul -- 90.7
13:15 USD Industrial production, % m/m (y/y) Aug 0.7 (-11.5) -0.5 (-13.0)
13:15 USD Capacity utilization, % Aug 69.1 68.5
17:00 USD NAHB housing index Sep 19 18

The Risk Today:

EurUsd Not expecting any notable long interest until we test the breakout level at 1.4445 or the uptrend at 1.4360. Moreover the pair is under pressure from the Wave 1 resistance between 1.4684 and 1.4876.

GbpUsd GBPUSD failed to advance above 1.6745 and currency facing significant headwinds in overbought conditions halting its bullish tone. Sterling came under significant selling pressure yesterday as BoE Governors words spooked the market. The Cable sold off from 1.6630 to 1.6500. Support now stands at 1.6425 breakout level then Key support at 1.6114.

UsdJpy Heavy JPY buying puts the USDJPY focus back on 90.0 support then 89.71. Resistance at 92.60 (61.8% retrace) high.

UsdChf Mid term the trend is bearish but intraday we are seeing oversold conditions however with no sign of divergence implies a range bound trading. Expect a period of consolidation before the SNBs meeting then Focus back on 1.0275 (76.4% retrace) low ahead of 1.0135.

Resistance and Support:

S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot