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FOMC Starts Two-Day Meeting

Consumer Inflation Data Due Ahead of Critical Federal Reserve Meeting

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As the two-day FOMC meeting gets underway the markets are likely to turn cautious in what could be the first hawkish Federal Reserve interest rate decision in close to a decade. Consumer inflation data will be the final piece to the puzzle and a surprise beat could shift market expectations drastically.

US Inflation Ahead

US consumer inflation data is scheduled for release later in the session. Heading into the event, expectations are for the headline consumer price index to have stayed flat while the core CPI is forecast to remain just above deflationary territory at 0.10%. Nevertheless, there remains potential for substantial downside risks on a miss to estimates which could see the US dollar start to drift lower as the futures markets continue to scale back the probability of a Fed rate hike increase at its two-day meeting starting today. Although the Federal Reserve follows PCE or personal consumption expenditure to track inflation, CPI readings carry similar weight. In particular, the focus will be on the annual core CPI which is currently tracking at 1.80%. Current estimates are projecting annualized CPI inflation to have risen to 1.90%.

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US Retail Sales Growth Decelerates

The retail sales for the US increased 0.20% month over month in August, below the median estimates of 0.30% as consumer sentiment continues to slip. Although core sales increased, declining gasoline prices, department, and furniture store sales kept growth pressured to the downside. Despite a soft retail sales print, the fact that the previous months retail sales data was revised significantly higher showed a healthy pace of growth in consumption through the third quarter. The US dollar failed to capitalize on the positive data on account of a weak Empire State Manufacturing Index which remained nearly unchanged at -14.1, ebbing not far from 2009 lows of -14.9. The EURUSD currency pair closed on a bearish note after attempting to test the daily highs near 1.1328 yesterday to settle the day at 1.1268.

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Focus on UK Jobs

At 09:30 GMT, the Office for National Statistics will be releasing the jobs report for August. Expectations and estimates point to the United Kingdom unemployment rate remaining unchanged at 5.60% for July while the average earnings index is expected to post soft growth of 2.50%, up from 2.40% previously. The average earnings index peaked at 2.70% in June before shifting back modestly lower but overall posted a healthy uptrend in the pace of average earnings. Helping earnings has been substantially lower inflation which has enabled stronger growth across the economy. GBPUSD posted strong declines yesterday after briefly rallying to intraday highs of 1.5450 before collapsing on weak inflation number which despite matching estimates showed muted inflation growth across the country. Cable turned weaker yesterday to close the day at the lows of 1.5342, looking to give back the gains made last week.

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US Equities Advance Cautiously

US equity benchmarks managed to post positive gains yesterday with the Dow, S&P500 and the NASDAQ all gaining on average of 1.20% or more. The Dow Jones Industrial Average has been consolidating since late August and is currently in the process of forming an ascending triangle pattern on the charts with the main upside resistance at 16672. A break above this critical resistance level could see the Dow rally towards 17246 region, just a few points below the previously broken support at 17443 level. There is of course, the risk of a breakdown of the minor trend line, in which case, the Dow Futures will likely find support near previous lows of 15687. Equity benchmakrs could turn cautious into today's US CPI data which is expected to have an impact on the outlook for the US economy.

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