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Markets:

Global core bonds eked out some gains today. The move was driven by the Bund with some spill-over effects to the US Note future. Two items played a role. First, rumours suggested that next week's ECB meeting is too early to change the central bank's forward guidance. They triggered some short covering on the sell-off inspired by amongst others hawkish ECB Minutes indicating changes to the communication strategy "early 2018". Second, the Berlin SPD chapter is expected to vote against formally starting coalition talks with the CDU/CSU. Following Saxony-Anhalt, it's the second region who revolts. This weekend's SPD party convention is crucial. The vote will mainly depend on support from the bigger states like eg North Rhine Westphalia. Going into the US session, core bonds stabilized. The US January empire manufacturing index disappointed, but didn't affect trading. The German yield curve bull flattens with yields declining 0.4 bps (2-yr) to 5.3 bps (30-yr). The US yield curve flattens with yield changes varying between +0.8 bps (2-yr) and -1.3 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrowed marginally with Italy (-3 bps) and Greece (-7 bps) outperforming. The Belgium debt agency successfully launched a new 10-yr OLO via syndication (OLO 85 €5bn Jun2028). The bond was priced to yield MS -17 bps. Books exceeded €20 bn.

The euro rally finally faced some headwinds. The single currency dropped half a big figure early in the session on headlines of rising opposition within the German SPD to start formal coalition talks with Chancellor Merkel's Christian Democratic party. Later in the session, the euro faced additional selling pressure on headlines that the ECB probably won't change its forward guidance at next week's policy meeting. The NY empire manufacturing survey was marginally softer than expected, but didn't hurt the dollar. The US currency maintained its intraday gains against the euro (EUR/USD currently low 1.22 area) and the yen (USD/JPY currently 110.70 area). For now, it is too early to conclude that the USD decline/euro rally is over.

The focus for sterling trading turned to the December UK price data. The report was mixed, but headline CPI declined to 3.0%. Core CPI even dropped to 2.5% from 2.7%. The decline confirms the BoE's scenario that inflation probably peaked around the turn of the year. It is expected the decline gradually from here. This scenario allows the BoE to keep a very gradual approach on further interest rate hikes in this and next year. The reaction of sterling to the data was very modest. Cable drifted from just below 1.38 to the mid 1.37 area. EUR/GBP initially hovered in the 0.8870/0.89 area as any selling pressure on sterling was countered by broad-based euro softness. Later in the session, additional EUR/USD selling pushed EUR/GBP further south in the 0.88 big figure (currently 0.8865/70 area). For now, the lingering debate on a new Brexit referendum doesn't help sterling.

News Headlines:

The European Central Bank is unlikely to ditch a pledge to keep buying bonds at next week's meeting as rate setters need more time to assess the outlook for the economy and the euro, three sources close to the matter said. We think that March is a more likely timing with new growth and inflation forecasts.

The Berlin chapter of SDP votes against starting formal coalition talks with the Christian Democrat-bloc based on result of exploratory talks, Der Spiegel magazine reports, citing Berlin SPD spokeswoman.

European equities extend the established uptrend with most indices gaining about 0.5%. US stock markets also continue their record race supported, amongst others, by strong (underlying) results from Citigroup. The Dow cleared the 26 000 mark. The S&P and the Nasdaq also show gains of up to 1%.

The US 30 index rose to a fresh record high of 26,084.50 during today's trading after significant advancing in the days that preceded.

The positively aligned and steep upward sloping Tenkan- and Kijun-sen lines are indicative of the bullish sentiment that is in place in the short-term. The RSI, which is rising as well, is also supporting the view for bullish momentum. The indicator though is well above the 70 overbought level, hinting to the possibility for a pullback from record high levels.

A decline could find support around the current level of the Tenkan-sen at 25,491.70, with steeper declines shifting the focus to the Kijun-sen at 25,146.20.

Despite the index breaking above 26,000, the area around this mark which could be of psychological significance, might still be providing some resistance to further gains. A more conclusive move that would distance the index from 26,000 to the upside could lead to stronger bullish movement, turning the attention to the 27,000 handle, this being another potential psychological level. Some points below 27,000 – for example the 26,500 level – might also function as potential key levels, acting as barriers to further advancing.

The outlook in the medium-term is clearly bullish: the index is in an uptrend with price action taking place above both the 50- and 100-day moving averages, as well as the Ichimoku cloud. Moreover, both MAs maintain a positive slope.

Overall, the short-term bias is bullish with some warning signs from an overbought RSI and the medium-term picture is also bullish.

Bitcoin was the talk across financial markets for all the wrong reasons on Tuesday, after prices tumbled sharply to their weakest level since early December at $11,192.

Market jitters over South Korea potentially banning cryptocurrency trading has effectively eroded investor appetite for Bitcoin. With reports on a renewed crackdown on the cryptocurrency in China fueling anxiety over future restrictions, further losses could be on the cards in the near term. The sharp depreciation witnessed in Bitcoin today should remind investors on how explosively volatile and unpredictable the cryptocurrency can be.

Financial heavyweight Warren Buffet has already warned that "cryptocurrencies will come to a bad end", and very early signs can be reflected in Bitcoin's bearish price action today. One has to ask if Bitcoin is currently in the process of flickering violently before it burns out?

From a technical standpoint, Bitcoin is under pressure on the Daily charts. The breakdown below $12,000 may encourage a further decline towards $11,000 and $10,000, respectively.

Commodity spotlight - Gold

Gold prices edged slightly lower on Tuesday with prices trading around $1336 as of writing, amid a stabilizing Dollar.

With the bias towards the Greenback still tilted to the downside, Gold is likely to remain supported this week. From a technical standpoint, the yellow metal is heavily bullish on the daily charts. Prices are trading comfortably above the 50 Simple moving averages, while the MACD has also crossed to the upside. A breakout and daily close above $1340 could inspire a further appreciation towards $1360. Alternatively, a scenario where bulls are unable to conquer the $1340 could spark a technical correction back towards the $1325.

Daily Pivots: (S1) 110.17; (P) 110.68; (R1) 111.03; More...

Intraday bias in USD/JPY remains neutral for consolidation above 110.32 temporary low. Outlook stays bearish as long as 113.38 resistance holds and deeper fall is expected. Break of 110.32 will extend the whole decline from 114.73 to 61.8% retracement of 107.31 to 114.73 at 110.14. We'd look for bottoming signal again below 110.14.

In the bigger picture, we're holding on to the view that correction from 118.65 is completed at 107.31. And medium term rise from 98.97 (2016 low) is going to resume soon. Sustained break of 114.73 should affirm our view and send USD/JPY through 118.65. However, break of 107.31 will dampen this view and extend the medium term fall back to 98.97 low.

Daily Pivots: (S1) 0.9592; (P) 0.9638; (R1) 0.9674; More....

A temporary low is in place at 0.9602 and intraday bias in USD/CHF is turned neutral first. Near term outlook will stay bearish as long as 0.9844 resistance holds. Below 0.9602 will extend the decline from 1.0037 to retest 0.9420 low.

In the bigger picture, range trading continues between 0.9420/1.0342. At this point, 0.9420 appears to be a strong support level. Therefore, in case of decline attempt, we don't expect a firm break of this level. Nonetheless, strong break of 1.0342 is also needed to confirm upside momentum. Otherwise, medium term outlook will stay neutral.

Daily Pivots: (S1) 1.3737; (P) 1.3777; (R1) 1.3833; More.....

A temporary top is in place at 1.3819 and intraday bias in GBP/USD is turned neutral first. At this point, we'd still expect strong resistance from 1.3835 to limit upside to complete the medium term rally from 1.1946. However, sustained break there will carry larger bullish implication and target long term fibonacci level at 1.5466. On the downside, firm break of 1.3457 support should confirm reversal.

In the bigger picture, the break of long term trend line resistance from 1.7190 (2014 high) is seen as a sign of long term reversal. However, rise from 1.1946 (2016 low) is not impulsive looking. And the pair is limited below 1.3835 key resistance. Hence, we won't turn bullish yet and would continue to monitor the development. On the downside, break of 1.3038 support will now indicate that rebound from 1.1946 has completed and turn outlook bearish. Meanwhile, sustained break of 1.3835 should at least send GBP/USD to 38.2% retracement of 2.1161 (2007 high) to 1.1946 (2016 low) at 1.5466.

Daily Pivots: (S1) 1.2202; (P) 1.2249 (R1) 1.2311; More....

A temporary top is in place at 1.2296 with the current retreat. Intraday bias in EUR/USD is turned neutral for consolidations. Near term outlook will remain bullish as long as 1.1915 support holds. Above 1.2296 will extend the medium term rally to 1.2494/2516 key resistance zone next. At this point, we'd expect strong resistance from there to limit upside and bring reversal. Meanwhile, firm break of 1.1915 will argue that the medium term trend is reversing earlier than expected.

In the bigger picture, rise from 1.0339 medium term bottom is still seen as a corrective move for the moment. Therefore, in case of another rally, we'd be expect 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516 to limit upside and bring reversal. That is also close to 61.8% projection of 1.0569 to 1.2091 from 1.1553 at 1.2494. Break of 1.1553 support will confirm completion of the rise. However, sustained break of 1.2516 will carry larger bullish implication and target 38.2% retracement of 1.6039 to 1.0339 at 1.3862.

The forex markets are generally trading within yesterday's range today as markets turn into consolidation mode. Dollar is trying to pare back some losses but there is no indication of bottoming yet. The greenback remains the weakest major currency for the week so far. Commodity currencies, in particular Aussie, stays strong. Elsewhere, markets are also in general risk seeking mode. At the time of writing, German DAX is up 0.95%, French CAC 40 is up 0.28%. FTSE 100 is nearly flat, though. US futures point to sharply higher open as markets come back from bank holiday. DOW would extend recent record run and would likely take on 26000 handle.

Released from US, Empire State Manufacturing index dropped to 17.7 in January, down from 18, missed expectation of 19.

ECB won't change communications at next week's meeting

Euro pares some recent gains after Reuters reported that ECB is unlikely to change it's communication at next week's meeting on January 25. Instead, it would wait until March meeting, after getting the new economic projections, to make a decision. One unnamed source said that ECB policy makers would need "more thorough analysis before making any change" to the communications. Another one said that markets' reactions to the minutes were "excessive". It referred to Euro's sharp rally after released of December monetary policy accounts published last week.

Yesterday, ECB Governing Council Member Ardo Hansson said in an interview that there was "need for action in our communication." This echoed the views noted in December ECB minutes released last week. Hansson said that "there are certainly good reasons to reduce the importance of the net purchases in our communication soon -- also with a view to a potential end to these purchases." And should incoming data show that the economy evolve in line with ECB's own projections, it would "certainly be conceivable and also appropriate to end the purchases after September." Also, he said that the "last step to zero" asset purchase is "not a big deal anymore". And "we can go to zero in one step without any problems". He also talked down Euro's rising exchange rate and said it's "not a threat to the inflation outlook" and one "shouldn't overdramatize" it.

Released from Eurozone, German CPI was finalized at 1.7% yoy in December, unrevised.

UK CPI slowed to 3% in December

UK headline CPI slowed to 3.0% yoy in December, down from 3.1% yoy, meeting expectation. CPI is still at the upper end of BoE's target rate of 2-3%. Core CPI also slowed to 2.5% yoy, down from 2.7% yoy and missed expectation of 2.6% yoy. RPI, on the other hand, accelerated to 4.1% yoy, up from 3.9% yoy and beat expectation of 3.9% yoy. PPI input slowed to 4.9% yoy, PPI output rose to 3.3% yoy, PPI output core rose to 2.5% yoy. House price index rose 4.1% yoy in November.

BoE MPC member Silvana Tenreyro said in speech yesterday that she "concurred" with the central bank's projections in the November inflation report. However, "in the medium-term, the risks to productivity may be skewed to the upside." She pointed to the drags on productivity from deleveraging in the financial sector and slowdown in manufacturing. However, the former is a process that would soon end. Meanwhile, global growth would help boost demand and manufactured goods from the UK. And productivity growth could beat BoE's forecasts once these two drags fade. She also noted that based on the November forecasts, BoE would need two more rate hikes over the next three years. But a better development in the economy could also change the rate outlook.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2202; (P) 1.2249 (R1) 1.2311; More....

A temporary top is in place at 1.2296 with the current retreat. Intraday bias in EUR/USD is turned neutral for consolidations. Near term outlook will remain bullish as long as 1.1915 support holds. Above 1.2296 will extend the medium term rally to 1.2494/2516 key resistance zone next. At this point, we'd expect strong resistance from there to limit upside and bring reversal. Meanwhile, firm break of 1.1915 will argue that the medium term trend is reversing earlier than expected.

In the bigger picture, rise from 1.0339 medium term bottom is still seen as a corrective move for the moment. Therefore, in case of another rally, we'd be expect 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516 to limit upside and bring reversal. That is also close to 61.8% projection of 1.0569 to 1.2091 from 1.1553 at 1.2494. Break of 1.1553 support will confirm completion of the rise. However, sustained break of 1.2516 will carry larger bullish implication and target 38.2% retracement of 1.6039 to 1.0339 at 1.3862.

Economic Indicators Update

The U.S dollar has erased intraday gains against the Japanese Yen during the European trading session, with the pair slipping back towards the 110.60 technical level. The USDJPY pair has looked past the current intraday rally in the U.S dollar index, with sellers using this morning's bounce towards the 110.90 level as a selling opportunity. With a lack of market moving macro-economic data coming from the United States later today, USDJPY traders will likely focus on the value of the U.S dollar index and U.S bond yields.

The USDJPY pair remains bearish while price-action trades below the 110.80 level, further losses towards the 110.33 and 109.80 levels seem likely.

Should the USDJPY pair start to move above the 110.80 level for a sustained period, buyers may push price-action towards the 111.22 and 111.45 resistance levels.

The euro has slipped back towards the 1.2200 support level against the U.S dollar, after news broke during the European session that Berlin's SPD party has rejected the proposal of coalition talks to form a Grand Coalition in Germany. Price-action has now settled around the 1.2220 level, after the pair fell sharply from the 1.2270 level, with the daily-low currently in place just above the key 1.2200 level. The U.S dollar index has also continued to firm towards the 90.80 level, adding further pressure to today's sell-off in the euro currency.

EURUSD trading sentiment remains bullish while trading above the 1.2200 level, further upside towards 1.2250 and 1.2310 still seems possible.

Should price-action on the EURUSD slip below the 1.2200 level, downside support is currently located at the 1.2156 and 1.2093 levels.