Investors continue to remain cautious with respect to risk with gold continuing to rise against the US Dollar to six week highs, as well as pushing higher against the single currency.

Stock markets are also continuing to trade listlessly on low volume in a fairly broad range.

In Japan, reports that the Bank of Japan will be considering steps to further ease monetary policy at an emergency meeting in Tokyo today have weakened the Yen and given the Nikkei 225 a boost. The most likely course of action could well be in the form of expanding the size of the stimulus package put in place last December.

The Pound will be in focus again today after yesterday’s Bank of England minutes saw the Pound rally from its lowest point in over a week. It was thought that Andrew Sentance might have changed his stance on interest rates given the down-beat assessment of the UK economy given by Mervyn King last week. However, that was always going to be unlikely given the current stickiness of inflation, and the confirmation of that saw a Sterling rebound.

Today’s UK economic data will keep the Pound firmly in the spotlight with the release of the latest retail sales figures and public finances data for July.

July retail sales (ex fuel) are expected to fall from a month on month 1% in June, to a rise of 0.2% in July, as consumers retrench ahead of concerns about future tax rises and spending cuts. The year on year figure is expected to fall from 3.1% to 1.8%.

Public finance data is expected to show a fall from the £14.5bn in June to only £4.8bn in July.

In the US the only data of note is the weekly jobless claims which are expected to come in around 480k which is a slight decrease of last weeks 484k, and the Philadelphia Fed for August, which is expected to show a slight increase to 7.5, from July’s figure of 5.1.

EURUSD – the single currency continues to find the air rather thin above 1.2900, making a slightly higher high at 1.2922 before retreating lower again.

However while below the larger resistance level between 1.2950 and 1.2980 downside pressures should continue to predominate.

The break below the 1.2820 level in Asia this morning now opens up the 1.2750/60 area which is trend line support from the 1.1880 lows.

Last week’s lows at 1.2735/40 should also offer some support while 1.2605, the 50% retracement of the 1.1880/1.3335 up move, remains the longer term objective.

We still need to be aware of the importance of the bearish engulfing week on the weekly candle charts which remains a significant sell signal, and while below 1.3000 the potential remains for further losses towards 1.2450 as a precursor to a revisit of the 1.2150 area.

GBPUSD – yesterday’s failure to break below the Pounds last line of defence at the 200 day moving average at 1.5495 sparked a sharp rebound towards 1.5700 yesterday. However, a failure to sustain a move back above 1.5710 through the 1.5730 resistance continues to weigh.

The bearish engulfing week candlestick remains the key factor weighing on the Pound, and a break and close below the 200 day moving average would be negative for Sterling. In fact it would open up the risk for further losses towards 1.5320 which would be a 38.2% retracement of the up move from the 1.4230 lows to the recent highs around 1.6000. Expect to find resistance on any rallies towards 1.5730 and 1.5820.

EURGBP – the failure to break through the larger resistance around the 0.8300/10 level prompted a sharp pull back in the single currency. However it needs to sustain a break below 0.8220 to re-target the 0.8170 area initially.

A test towards the previous lows around the 0.8065/70 level remains the preferred scenario while below the 0.8300/10 resistance.

USDJPY – the Yen spread trading market remains stubbornly within the broad range outlined in the last two days treading water between the resistance highs around the 86.25 level and the fairly solid support down around the 84.70/80, as well as short term support around the 85.20 area.

Traders continue to remain cautious about whether Japanese officials will sanction steps to stem the Yen’s recent rise.

Only a rally beyond the 87.00 level, the May flash crash lows could prompt an unwinding of Yen long positions. In the absence of any physical intervention, there remains the possibility of seeing a re-test towards the 1995 levels just below 80.00.

By Michael Hewson, Market Analyst, CMC Markets.

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