The potential trade dispute between China and the US cranked up another notch yesterday as US law makers voted overwhelming in favour of measures that would allow levies to be placed on US imports of Chinese goods.

The bill would have to be ratified by the Senate and President before any action is taken, and this is unlikely to happen until after the mid-term election in early November, but the US is hoping the threat of action is enough to spur the Chinese into further appreciation of the Yuan.

But, as the US knows, we are in a very different position from 1985 and the Plaza accord. China is in the position of strength and direct threats of manipulation by the US will be somewhat ineffective in forcing the Chinese to deviate from their gradualist economic plans.

The Dollar trades lower on the news in cable, but with US GDP figures out this afternoon and the Federal Reserve’s finger firmly on the QEII trigger, expect volatility when the US opens early this afternoon.

The figure is forecast for 1.8% year-on-year, so any figure south of that will send Sterling, which has all the momentum at the moment, higher against the USD.

Elsewhere in CFD markets, the Euro has been on a fantastic run recently, gaining against both the Dollar and Euro and momentum seems to trump data just now.

News of the full estimated costs for the Irish Government of the bailout of Anglo Irish (estimated at €29 Billion) and the last of the rating agencies stripping Spain of top credit rating have not been enough to halt frenzied buying of the single currency over the past week.

We now trade over 1.36 in EUR/USD and 1.1653 in GBP/EUR after German unemployment figures again impressed coming in way above forecast.

Sterling is very much along for the ride just now, buffeted from all sides by news from the Eurozone, US, Japan and China.

Yesterday, mortgage approvals fell once again and MPC members Adam Posen and Charles Bean both suggested the British economy will face increasing headwinds in 2011 and consumer confidence figures also fell short of estimates. But news else where is moving the GBP pairs and we can expect this trend to continue in the near future.

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Rumours are circulating that the Fed will commence a second period of asset purchases or QE2 as early as November.

The weaker than expected level for US consumer confidence in September published on Tuesday has only supported this feeling as sentiment continues to be hit by job market concerns.

Consequently, the US Dollar remains under pressure, with little sign of stopping. The potential of further US Dollar unravelling as well as interference in many countries to avoid their currencies from strengthening against the USD continues to influence gold prices which hit a new record high, smashing through the $1300 per troy ounce mark.

In the present financial situation it is hard to see gold prices turning much lower, however there will be the usual bounces as profit taking occurs.

The Euro remains a key winner of US Dollar weakness but this currency has issues of its own to deal with. Without a doubt, peripheral debt concerns, particularly concerning Ireland and to a smaller degree Portugal, have increased. Borrowing expenses increasing as the yield on their arrears widens in addition to core Eurozone debt.

The Euro rise will only make it difficult for these countries to make any kind of recovery and could also hurt the established exporting countries of Northern Europe led by Germany. To date however the Euro has displayed some notable buoyancy to renewed peripheral country sovereign debt concerns together with comments by S&P regarding the high costs of saving an Irish Bank.

Conceivably, the awareness that there is a still a vast bailout fund from the EU and IMF on hand if necessary and also the viewpoint that the ECB will add to its buying of Eurozone debt, has provided a buffer for the Euro.

In the future the ECB may be required to join the group in at least trying to talk its currency lower, however at this point the central bank is showing no preference to either talk down the currency or artificially intervene to weaken the single currency. In the interim, EUR/USD is likely to strengthen further in spite of the probable harmful impact on European growth.

Elsewhere in the CFD markets, a currency that may benefit in the wake of potential of Fed QE2 is the Pound. Indecision over whether the BoE will follow the Fed in implementing further quantitative easing could see sterling delay the gains in other currencies against the greenback.

Contradictory comments from MPC members Posen who noted that there might be a requirement for additional QE in the UK to hold up the stumbling economy were opposed by Sentance, who concluded that there was no need for more QE. Sterling Dollar is likely be whipsawed as the debate continues and is set to lose additional ground against the EUR.

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GDP figures for the UK were released this morning showing a rise of 1.2% QoQ for the 2nd month in succession leading to a strong start for Sterling against its rivals.

The leading indicator of economic health also illustrated an increase of 1.7% YoY painting the picture that the UK economy is steadying and looking at sluggish, but stable growth. The news has kept the pound above 1.58 against the Dollar, but also seen it bounce back over 1.18 in trading against the Euro. This has also been on the back of comments from the IMF and the BoE.

Firstly, the International Monetary Fund endorsed Chancellor George Osborne’s deficit reduction plans stating that the UK was “on the mend” and added the plan “greatly reduces the risk off a loss of confidence in public finances and supports a balanced recovery”. Secondly, BoE Deputy Governor Charlie Bean said the central bank wanted households to “spend more rather than save”.

The Euro has taken a small hit this morning as Moody’s announced it was slashing the ratings of Anglo Irish’s debt, unnerving investors as Dublin tots up the final cost of rescuing the lender whose loans have crippled the Irish economy.

Government bond spreads between Germany and the struggling nations of Europe have widened again, leading to more fears over the Eurozone debt situation. Euro/Dollar is down a cent, which will bring relief to all exporters to the US as the pairing runs up against stronger resistance; it has been sitting on 5 month highs.

The Dollar received a bit of a boost in Asian trading on an article in the Wall St Journal, in which it discussed the method that the FED might use for any proposed QEII measures.

In a nutshell, it said rather than announcing a programme of massive bond purchases with a finite end, as they did in 2009 in attempt to shock the U.S. financial system back to life, Federal Reserve officials are weighing a more open-ended, smaller-scale programme that they could tinker with as the recovery unfolds.

While noting that “The Fed hasn’t yet decided to step up its bond purchases, let alone agree on an approach”, the article will no doubt go a long way to confirming expectations that both QEII is coming and the probable form in which it will be seen.

Today, we are due some consumer information from Europe. This will leave Sterling to be dragged to and fro by the evolution in Euro/Dollar. Following on from yesterday’s positive assessment from the IMF however, a number in line with market expectations might give the currency a small period of reprieve.

Elsewhere in CFD trading, more market relevant data ought to emerge from the US later with the Case-Shiller housing index, consumer confidence info and the Richmond Fed manufacturing index for September.

There is a chance that all three will disappoint and a weak batch of data will only serve to underline the strong chances for additional QE being announced at or prior to the next FOMC meeting at the beginning of November.

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Today marks the start of a busy week in the FX markets. A large amount of important data releases are scheduled for release this week and several prominent central bankers are due to speak.

This is set against the backdrop of further intervention by Japanese authorities, aimed at curbing Yen strength and further grumblings by the US of China’s refusal to let the Yuan appreciate to fair levels against the Dollar.

The Greenback is yet to recover from last week’s Fed meeting and continues to struggle across the board. This afternoon the Chicago Fed National Activity Index will probably show a further slowdown in economic activity so expect the Euro and Sterling to cling stubbornly onto the gains from last week until tomorrow.

Elsewhere in CFD market trading, US GDP is announced later this week, with a slight increase from 1.6 to 1.8 per cent forecasted. Both the Fed and the markets will be following the figures closely, as disappointing figures may mark the start of the ‘exceptional measures’ the Fed mentioned in the last meeting.

UK GDP figures are released on Tuesday. This is vital number to the future path of Sterling, with positive growth critical in the face of the steep government spending cuts just over the horizon.

The fear among some economists is that announced cuts will reduce growth below the levels required to service existing debt payments. This could, potentially, cause us into a death spiral of further cuts and further reductions in growth, leading to further cuts etc….

The UK housing market also showed further signs of slowing: All Britain’s regions showed monthly price declines in the Hometrack Housing Survey.

The Euro continues to trade strongly this morning, even in the face of mounting pressure on the Irish banking system and their ability to successfully wind up the loss making Anglo Irish.

The Eurozone clearly wants Ireland to find a market solution to their budget problems. However judging from the price they had to pay at last week’s auction, whether they can keep tapping the market for funds or decide to throw the towel in and access the EU bail out fund in still highly uncertain.

Tomorrow sees German CPI figures & French and Italian consumer confidence data released which is forecast to be broadly positive. The risk for the Euro is the sovereign debt problems again dominating the news flow (which is broadly positive) and forcing the Euro lower again.

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The big question economists are asking is how long the recent Euro strength / Dollar weakness will last?

Price action topped at $1.3438 yesterday despite weaker Eurozone data in the form of Eurozone PMI. The rate held above $1.3335, which coincidentally was the exact level we were at in August before the Euro decided move south and dip to $1.2600.

Today is a quiet day in terms of data although the current level could make the German IFO release at 9.00am this morning very interesting. Once again, the potential difficulty is the future expectation component.

If, as seems likely, the position for the German economy remains ominous, coupled with the concerns over Eurozone sovereign debt issuance requirements, the present value of the Euro may demonstrate a little over reaction. However, numbers in line should see Euro/Dollar CFD market have another quick sniff at $1.3400.

The Far East session was again destroyed by holidays but what promised to be an ordinary trading period was enlivened by a swift leap in Dollar/Yen from ¥84.50 to ¥85.30 in the matter of half an hour; intervention perhaps?

No comment was the official response. This would be surprising if the BoJ had been involved as why would they try and push the rate and then deny it. As a result, the market spent the next couple of hours allowing the cross to ease back to the ¥84.60 level.

With no additional action, it looks as though the move was just a business related move but the European traders will remain cautious. The BoJ are nothing if not consistent and if it was them earlier on, then they will be expected to mirror their previous attempt at currency manipulation on 14th September by overruling again in Europe and also in New York.

Today is quiet other than the German data we have to look out for durable goods and new home sales figures from the US. The previous is an extremely unstable and mostly ignored release whereas traders will wish that the housing numbers reflect yesterday’s better performance for the property market.

Commodity CFDs remain strong, with Gold the headliner. This continues to wend its way higher but other less high profile assets are also making waves.

Silver is now at a 30-year high, again with further to go, and the entire commodity scenario argues for continued gains in the Australian and Canadian currencies.

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The FOMC decision and statement from Tuesday evening was still the catalyst of movements in all of the markets yesterday, as Asian and European investors had the opportunity to react to the news.

Further US Data also showed that home prices dropped 3.3% in July from a year earlier, the eighth consecutive decline, as foreclosed properties flooded the market.

Prices fell 0.5% from June versus a market expectation for only a 0.2% decline, the Federal Housing Finance Agency in Washington said yesterday. The time it would take to clear the market of homes for sale also hit a 10 year high of 12.5 months.

Elsewhere in CFD markets data from the European Union’s statistics office yesterday showed that industrial orders declined more than economists forecast in July. This was partly due to a drop in capital goods orders such as factory machinery.

Orders in the 16-nation euro area decreased 2.4% from June, when they rose 2.4%. Economists had expected orders to drop 1.4%. Eurozone consumer confidence figures for September also remained unchanged from the August reading at -11.

The minutes of the most recent Bank of England (BoE) meeting, released yesterday, signalled that it is edging closer to more asset purchases. This follows the Federal Reserve’s suit in contemplating further stimulus to revive a flagging economic recovery.

This may force the expansion of the central bank’s £200 billion government bond policy to become a higher priority for the UK officials, as well as the buying of other securities.

Policy maker Adam Posen last week argued that a ‘plan B approach’ for the BoE should be ‘heavy-duty credit easing’. The Confederation of British Industry also cut its gross domestic product forecast for next year.

On the US data front today, we have US initial unemployment claims for the week ending September 18 and August’s existing home sales. In Europe, we have the first reading of the PMIs. A moderate decline of the composite index from 56.2 to 55.7 is expected.

For this indicator, the question will be whether the actual decline, if any, will be enough to shift the market focus again to the risks of Europe in such a way that it will outweigh the overall story of dollar weakness.

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The Federal Reserve meeting yesterday evening did not throw up any surprises, but the Fed signalled a more sluggish outlook for the US economy and reiterated its willingness to take additional measures to boost the economy.

There was no mention of concrete action as yet which, given the fact that we are rapidly approaching US mid-term elections, is sensible. However, the change in tone from “wait and see” to “we stand ready to act” was enough to reverse all of the Dollars recent gains in a broad sell off overnight.

We will soon see if the market is correctly pricing another bout of QE in the near term or if this move will be shrugged off quickly since central bank threats have been spectacularly unsuccessful over the past few months.

The Dollar sell off also brings the Japanese FX intervention back into focus, as the USD/JPY pair moves back towards levels where intervention initially occurred. Prime Minister Kan has been quoted as saying the intervention in the CFDs markets is not yet over. The fear is that this is fast becoming a beggar-thy-neighbour competitive devaluation as central banks scramble to keep exchange rates low in the hope of stimulating the faltering economic recovery.

The only problem is that not everyone can do it at the same time. We can expect emerging markets and the commodity producing nations to be none to happy about the prospect of significantly reduced competitiveness in world markets.

The Euro is benefiting from the Dollar weakness. The Irish and Spanish bond auctions were broadly successful, the only issue was the high interest rate the market extracted for buying the Irish debt, and we have moved past $1.33 in the EUR/USD pair and under the €1.18 level in GBP/EUR.

This afternoon we get to see Eurozone consumer confidence, with another improvement forecast, but with a large amount of Eurozone data out on Thursday and Friday we can expect the Dollar to lead the way today.

Sterling is also benefiting from the Fed statement. Dire public borrowing figures initially sent the Pound lower in early trading yesterday and today’s publication of the Bank of England minutes passed without much notice being taken.

For the rest of the week we will probably see Sterling take a back seat until next weeks GDP figures. However, we should bear in mind the poor data flow in the UK means the pressure on Sterling is on the down rather than the upside.

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Following recent ripples on the surface of the Eurozone sovereign bond yield pool the market will be able to witness firsthand just how much the cost of borrowing has increased for the region’s peripheral countries with auctions from Ireland today and Portugal tomorrow.

The spread between the yields on German bonds and the rest has been widening this week therefore the results from Ireland’s efforts to sell up to Euro 1.5 billion in 4 and 8-year bonds and those from the more beleaguered Portugal, looking to raise about Euro 1 billion, might well set the trend for the Euro for the coming weeks.

The higher cost of funds for all but the mighty few will intensify pressure on government finances, weaken bank balance sheets, generally tighten credit conditions and overall increase the risk of a deeper recession in Europe.

This could affect the online CFDs markets as it leaves the Euro itself mightily vulnerable, with certain currency analysts targeting $1.20 versus the Dollar by the year end. Watch out for both levels of demand and yield as a sign of investor appetite.

The FOMC will more than likely disappoint traders looking for something a bit different. I expect, as does the rest of the universe, no change in rates or liquidity addition measures and doubt that there will be any tangible change in the accompanying statement.

The US Federal Reserve will probably retain the ‘extended period’ language and is unlikely to signal any proposed change to their reinvestment programme.

With respect to the outlook, the Fed may indicate that the pace of recovery in the near-term is likely to remain modest and as for prices, following last week’s benign core CPI reading, analysts do not expect any meaningful changes to the Fed’s stated expectations for inflation to be “subdued for some time.”

In other words no alteration to policy for yet another month.

Other than these 2 events, today is again bereft of market moving releases. We are due the monthly report from the UK on the government’s public finances but with expectations of another BIG deficit unlikely to be misplaced, there should be little surprise factor here.

Sterling has been soft this morning on very little but with decent support at €1.1850 level, there could be a bounce following the results of the bond auction.

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The dollar has fallen towards a five-week low against the euro before a report today that could show that the US housing market remains weak, adding to evidence that the world’s largest economy is slowing.

The US currency weakened versus 12 of its 16 major counterparts on speculation that the Federal Reserve’s Open Market Committee will also confirm that it is considering further measures to keep borrowing costs low at their meeting tomorrow.

In the UK, data released this morning has revealed that home sellers lowered asking prices for a third month in September, wiping out half of the gains made since the start of 2010.

Average asking prices in England and Wales fell 1.1 percent from the previous month and 3.4 percent over the last three months according to Rightmove, the operator of Britain’s biggest property website.

A pickup in the supply of homes for sale is putting downward pressure on prices, while curbs on lending by banks are crimping demand. Bank of England Governor Mervyn King noted last week that bank balance sheets “are not in tremendously robust shape”, and that this may continue to restrain lending.

Elsewhere in the CFDs markets, the Australian dollar has increased towards a two-year high after central bank Governor Glenn Stevens signalled earlier this morning that policy makers may need to resume raising interest rates should a mining boom stoke the economy next year and boost inflation.

The currency has gained 6 percent so far this month as traders increased their assessment of the chances that the Reserve Bank of Australia will increase their benchmark rate on 5th October to 29 per cent.

Today, the economic calendar is again very thin. In the US, the NAHB housing market index will be published whilst in the UK, M4 money supply data will be released. Global factors will continue to guide the price action on markets so market chatter on government finances of countries like Ireland and Portugal may continue to weigh on sentiment.

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Over the past 10 years, the deliberate undervaluation of the Yuan by Chinese authorities has always been the elephant in the room in FX markets. The Chinese economic juggernaut has been powered by exports of manufactured goods to the West made cheap by very low input costs.

China has been labelled the workshop of the world: an eight per cent average growth over the past thirty years has turned the underdeveloped middle kingdom to an economic powerhouse and the second largest economy in the world.

America has long known China would overtake them eventually as the largest economy in the world, but they feel the Yuan undervaluation is giving the Chinese an unfair advantage.

The cheap currency encourages Chinese exports and promotes outsourcing of jobs from the US to China, which in a time of sluggish economic growth and stubbornly high unemployment in the US, automatically makes it political hot potato.

Treasury Secretary Tim Geithner’s comments yesterday that the US would use ‘all the tools we have’ to reverse the bloated trade deficit with China – including WTO rules on fair trade – should come as no surprise in content, only in strength, given the usual soft tone used in diplomatic circles.

His comments come on the back of direct Japanese intervention earlier in the week aimed a curbing the strength of the Yen, and raises the prospect of a triangular trade dispute between the three largest economies in the world.

Sterling was, quite frankly, all over the place yesterday. Disappointing retail sales figures pushed the pound quickly lower in early trading, but as seems to be the way just now, we shook the negative news off quickly and resumed the march towards 1.57 against the USD.

An improvement in risk sentiment has aided Sterling’s move, as has improving economic data in Europe and the successful Spanish bond auction yesterday. The Euro has been driven higher against the Dollar, lifting Sterling versus the USD as well and we now trade over 1.31 in EUR/USD and 1.57 in GBP/USD.

Today, the eco calendar contains only some second tier eco data on the CFD markets in Europe. In the US, the CPI and the Michigan consumer confidence are on the agenda. Inflation data hasn’t been a big issue for currency trading recently, however with markets focused on whether or not the Fed should engage in more QE, a lower than expected figure could be slightly dollar negative.

CFDs, margined forex and financial spread trading are leveraged products. They carry a high level of risk to your fund. It is possible to lose more than your initial capital outlay with these products and they may not be suitable for all investors, do ensure that you fully understand the risks involved, seek independent financial advice if necessary.

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