The ECB meeting will dominate this week

After a week of wrangling in Congress, the deadline draws closer as we approach a moment of real concern that there will be a government shutdown.

The dollar index dropped to its lowest levels in February this year, with bets against the US dollar continuing as the market has yet to fully price this in. Meanwhile, flight-to-safety assets such as gold are holding up. Since the FOMC meeting, investors have moved away from USD bets, believing that economic growth in the US is lower than it ought to be.

This week’s data releases’ focal points are Chicago PMI (Monday), jobless claims (Thursday), NFPL and ISM’s manufacturing (Tuesday) and services (Thursday), which will be an indication of the business environment.

Japan

In Japan, the focus will be on Prime Minister Abe’s speech tomorrow, outlining plans for the consumption tax and support package, such as lowering corporate tax to counter the effect of this tax hike. Signs that Abenomics is working have convinced the international community, while the Japanese investors are still sceptical after living through decades of deflation. Last week, the USD/JPY pair faced strong resistance and failed to stay above 100.

This week, we see a support level at 98, which is held up by price action from March. This is key, and any breakdown in this support would mean the USD/JPY consolidation is over with further downside, while a failure to break this wedge would mean consolidation is here to stay for the time being.

Wednesday’s ECB will dominate this week. While we expect the central bank to keep its policy rate unchanged, Mario Draghi is likely to reiterate the weak economic growth in this region and the use of other stimulus which will cap the euro’s strength. Unemployment rate (Tuesday) in the eurozone is expected to remain stubbornly high at 12.1% despite the region coming out of a recession.

Southern Europe

Southern Europe remained mired in high unemployment as their economies struggle. There has been drama in the Italian government, with Prime Minister Enrico Letta forced to request a confidence vote on 2 October as his partner in the ruling coalition, Silvio Berlusconi, and his ministers exited the government.

The UK economic recovery is gaining momentum, with traders flocking to bet on the British pound. The upward momentum continues as we see a series of rising highs in this bullish formation. Having said this, sterling is close to its resistance level of 1.6170 which is also the Fibonacci retracement level. Failure to break this should cause price consolidation between 1.6000 to 1.6170.

This week, Thursday’s UK services PMI for September is expected to show growth momentum in Q3, with the expectation that it will be at a six-year high of 60.5, according to the Bloomberg survey.

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