Expectations of the next move by the Federal Reserve dominated latter stages of trading last week

Consumer prices in the US rose 0.5% in August matching July’s figure, while inflation, excluding food and energy, held at +0.1%. Tuesday sees the FOMC rate decision release with the result being far from clear. Having seen the core CPI rise 0.1% or less for five straight months, inflationary pressures seem to have eased.

However, surging oil prices, as a knock-on effect from Katrina, has left this month’s decision difficult to predict. It has been suggested that the FED may drop the ‘measured’ language, so all eyes will be on accompanying minutes for hints as to their stance in the coming months.

Friday saw the release of the US Q2 Current Account deficit. Expectations were -$193 bn, the actual number came in slightly wider at -$195.66 bn.

The Dollar strengthened aggressively on the back of strong capital inflow numbers, which indicated flows of $87.4 bn in July and a revision higher of June’s number. Capital inflows stood well above the -$57.9 bn trade deficit for the same month, hence Cable’s move lower in late trading.

Election deadlock in Germany dominates the headlines this morning with both chancellor Schroeder and his conservative challenger Angela Merkel claiming victory and the right to form the next government.

The Euro declined 1.5% to trade at 1.2216 late on Friday in London amid concerns that the German election may not deliver a clear winner and these concerns have been confirmed.

The Euro has fallen across the board this morning, and is likely to remain under pressure until the uncertainty is removed from the market. The most likely outcome will be for a ‘grand coalition’ to be formed.

In this instance Merkel would probably become chancellor, Schroeder would vacate his position and the head of the SPD (whoever he/she is) would get the job as foreign secretary or finance minister. The German economy is the undoubted loser in this political mire.

This week data releases include the UK RICs housing survey for August, the market will be expecting further indications of weakness. The FOMC decision as already mentioned will be the focus on Tuesday, with attention then turning to the Bank of England minutes on Wednesday.

In August the MPC were split 5-4 so there will be some speculation of a possible split in September. However since the last meeting rising oil prices have caused concern and will be interpreted as negative for future growth and inflation, therefore the result may be more clear-cut.