As we move into the middle of the week, traders are becoming ever more concerned with the two major events of the week: the FOMC meeting and the Scottish independence vote. There is also a third force at play which is the slightly increased tensions in eastern Ukraine once more.
Having begun the European session with a modicum of control, the dollar bulls have given up much of the gains, leaving the greenback trading negatively against the euro, yen, Swissy and gold. The one major currency the dollar is trading well against is sterling. The chief reasons for the underperformance of the pound is that traders are growing ever fearful of the result from Thursday’s Scottish independence vote. These fears are also being seen in the FTSE 100 which is sharply lower now.
Sterling has not been helped either by the announcement this morning of August inflation. CPI fell to 1.5% which was in line with expectations, but the data has been below the Bank of England’s target of 2.0% since December last year. This reading will give the doves on the MPC little reason to move from the stance of steady rates any time soon. Tomorrow’s wage inflation data that is released as part of the employment announcement will be interesting tho as any pickup would see the gap begin to close. Despite the pressure on sterling assets today, gilt yields are falling again (ie. gilts are being bought) as this CPI data is dovish for the rate decision.
As I spoke about in the morning report today, the recovery on GBP/USD appears to have been scuppered at the 38.2% Fibonacci retracement of $1.6644/$1.6050 at $1.6278 and now the sellers are gathering momentum. Keeping in mind how bearish Cable has been and how nervous traders are about the Scottish independence vote, this momentum could really take off to the downside. The resistance at $1.6250 is now a near term level to watch as it is the latest in a line of lower highs over the past few days. The outlook is beginning to come under pressure once more.
Contrast the moves on Cable with that of EUR/USD and USD/JPY, both of which have just consolidated through the morning. The last couple of days have really had a sense of waiting for the next catalyst. Although there is the US inflation data tomorow, unless there is a drastic surprise, the market will be looking towards the FOMC later in the session. After climbing almost non stop for three weeks, the Dollar Index (.DXY) has flattened off for the past few days. Whilst a large portion of moves on DXY is the euro (c. 57% of the basket is made up from the euro), there is still a sense of consolidation in from of what could be a key meeting for the Fed. Uncertainty over whether the Fed will hawkishly alter its forward guidance by removing “a considerable time” from the wording of the statement with regards to how long it will keep rates at ultra low levels, could mean the euro remains around flat until the meeting, but could also ensure significant volatility after the release.
Tensions are just beginning to come back to the boil once more in eastern Ukraine as the ceasefire which has apparently been in place for over a week begins to bend and creak. This along with the dollar consolidation is helping to support a small rebound in gold. However, I still expect the gold price to form another lower high between $1240 and $1260 and this bounce could be eyed as a chance to sell.
Equity markets are taking on the pressure of all three factors today, with the European markets around 0.5% lower. S&P 500 futures are called around 3 points down at the open to continue the gradual corrective slide on Wall Street. However the FTSE 100 is once more threatening a close below 6800 which would be a three week closing low and the prospect of a head & shoulders top pattern (which would target 6640 on a close below 6773) is growing. The DAX needs to continue to form support above 9600 but the downside pressure continues to grow on the key pivot level.