Having failed to move above the 200-day SMA and trend line resistance at 4,320 earlier this week, the S&P500 slipped back sharply yesterday, weighed down by concerns over weakness in the US economy, as well as profit taking after four consecutive days of gains. Rising yields also weighed on sentiment after CPI inflation in the UK pushed above 10% to a record 10.1% in July.

Last night’s Fed minutes showed that officials on the FOMC were concerned that there was a risk they might overtighten in their attempts to convince markets they were serious about keeping a lid on inflation.

That said there was a general consensus that rates might need to stay restrictive for some time to keep prices in check given a lack of confidence that inflation was likely to improve in the short term.

There was an acknowledgement that the pace of rate rises might need to slow at some point, however this more or less goes without saying.  

The key takeaway from these minutes would appear to show that there is little inclination on the part of anyone on the FOMC to even look at the possibility of rate cuts, and chime with more recent comments from Fed officials which suggest that we could see at least another 1.5% in rate rises by year end, which would push the Fed Funds rate at 3.75-4% by year end.

All in all, the minutes did nothing to alter the direction of stock markets yesterday, which saw European markets close sharply in the red, after UK inflation surged into double figures in July, driven by high food and energy prices.

We also saw EU Q2 GDP get revised lower, as investors mulled the prospect that today’s EU CPI is likely to go even higher from the 8.9% level that we’re currently expecting to see in today’s final adjustment for July. Core CPI is expected to remain steady at 4%.

Earlier this week the latest Empire Fed manufacturing survey for August fell off a cliff with the headline number falling from 11.1 in July to -31.3. New orders fell to -29.6 from 6.2, while prices paid also fell to 55.5 from 64.3.

This was a truly shocking number which if replicated in today’s Philadelphia Fed business survey for August could raise serious questions about the resilience of the US economy on the eastern seaboard of the US. In July this saw a decline to -12.3, however we are expecting to see a modest improvement to -5.3.

The recent US payrolls report showed that the jobs market is in good health despite the recent rise in weekly jobless claims which last week hit their highest levels in 8 months. This trend looks set to continue today with another increase to 264k.

While European and US markets both closed lower yesterday, the late rebound off the lows of the day in the US looks set to translate into a positive open for European stocks today.

EUR/USD – Appears to be ranging for now but the downside bias towards 0.9950 prevails. The 1.0220 area now becomes minor resistance, followed by major trend line resistance from the January highs at 1.0340.  

GBP/USD – Continues to hold above the 1.2000 level which is the RHS of the possible inverse H&S formation with the neckline at 1.2270. A break through 1.2300 targets a move towards 1.2600. A move below the 1.1960 area targets the July lows.

EUR/GBP – Slipped back to the 0.8380 area before rebounding. Still have resistance just below the 0.8500 area, the bias remains for a retest of the 0.8340 area.   

USD/JPY – Remains in the cloud range, rebuffed yesterday by resistance at the 135.40/50 area and 50-day SMA. Now have support at 132.80. Below 131.60 targets the 130.20 area.  

FTSE100 is expected to open 3 points lower at 7,512.

DAX is expected to open 18 points higher at 13,644.

CAC40 is expected to open 12 points higher at 6,540.

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