Markets have been supported overnight by the latest minutes from the Federal Reserve that were more dovish than most had been expecting, and fitted much more with our original estimation of further easing from the central bank in September, as opposed to later in the year. The language suggested that the slight improvements we have seen in the jobs market and the slow grind higher in equity markets has not been enough to convince the board that the economy can be left as is. “Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,� was the key phrasing and it now seems that the Fed Chair Ben Bernanke will expand QE either at the Jackson Hole symposium next week, or at their scheduled September meeting. The dollar smashed lower on the news with GBP/USD breaking to fresh 3 month highs while EUR/USD kept its head above 1.25. Similar losses have been for the dollar against its other crosses while gold, oil and other commodities have flown higher on inflation expectations. This move by the Federal Reserve has formed the basis of our currency predictions through 2012 and we look for an eventual extension of these dollar losses through Q3 and Q4. The fact that Chinese data overnight was honking and has barely grazed the dollar losses from the Fed minutes is very important. The latest HSBC PMI data for the Chinese manufacturing sector fell to 47.8 in August, the lowest since November, with the exports component falling into the 44s. This denotes serious contraction in arguably the most important part of the Chinese economy, and will raise expectations of a hard landing and hopes of further stimulus from the authorities. Europe was quiet yesterday with the meeting between Samaras and Juncker conforming to the typical meeting between politicians of not advancing the agenda a single inch. The main headline was that there would be no Greek aid decision before October and the decision would rest on the basis of the latest Troika assessment. The effect on EUR was minimal as expected although event risk remains from meetings between EU politicians later today and tomorrow. German GDP has been confirmed at 0.3% in Q2 this morning following the 0.5% rise in Q1, with exports driving higher by 2.5%. The latest PMI numbers from France and Germany are also due this morning with manufacturing likely to remain in contractionary territory while services should break above 50.0.

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