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AUDUSD is neutral in the short term after a strong rally pushed the market to overbought conditions and consequently upside momentum faded. AUDUSD remains under corrective pressure after failing to breach the key 0.7900 level but came close to it last week.

The second bullish phase that started after the break above the 200-day moving average in December is still in progress and there are no signs of a reversal in the trend yet. The recent pullback from the January 5 high of 0.7874 saw AUDUSD move into a consolidation phase and there is scope for another push higher towards the major 0.7900 level.

Only a daily close below 0.7800 would indicate that a short-term top is in place at 0.7874. Strong support is expected at the 200-day MA which is converging with the key 0.7700 level. A move lower from here would turn the focus to the December 8 low at 0.7500.

Short-term price action looks soft for now. AUDUSD needs to regain upside momentum soon to rise above 0.7900, otherwise, downside risk will increase quickly.

Here are the latest developments in global markets:

FOREX: The US dollar index was marginally lower on Wednesday, after previously trading higher for three days in a row.

STOCKS: Asian markets were mixed, with Japan’s Nikkei 225 declining by more than 0.2%, pulling back from the 26-year high it reached earlier in the week, though still remaining close to those multi-decade high levels. Meanwhile, the Topix added 0.15% while in Hong Kong, the Hang Seng was higher by 0.4%. In Europe, Euro Stoxx 50 futures suggest the index is likely to open slightly in the red. Over in the US, all three of the major indices – S&P 500, Dow Jones, and Nasdaq Composite – finished in the green yesterday, hitting fresh all-time highs. However, futures tracking the S&P, Dow, and Nasdaq 100 are currently in negative territory.

COMMODITIES: Energy prices extended their recent gains overnight, with WTI and Brent crude climbing 0.8% and 0.5% respectively, the former reaching highs last seen in 2014. The moves came after the weekly private API inventory data signaled that US crude stockpiles are declining faster than previously anticipated. The report showed an 11.2 million barrels drawdown in inventories, much larger than the consensus of a 3.9 million reduction. The API data are generally considered as a gauge of the official EIA data – due out today. Gold traded lower on Wednesday, but only marginally.

Major movers: Yen rebounds further as shorts unwind; euro unfazed by political news

The Japanese yen continued to recover during the Asian trading session Wednesday. Dollar/yen fell more than 0.7%, last trading near the 111.90 territory, with the next major support zone being near 111.70. Even though there was no clear fundamental catalyst behind the move, the JPY’s gains are being attributed to speculation that the Bank of Japan (BoJ) could begin to unwind its massive stimulus program, following news yesterday that the Bank bought fewer bonds under its regular operations.

However, as outlined here yesterday, the fact that the BoJ bought fewer bonds is not necessarily a signal that the Bank is moving towards tapering. It simply shows that the Bank did not need to buy as many bonds as usual in order to achieve its goal of keeping yields on longer-dated Japanese bonds fixed near 0%. Overall, the BoJ appears set to continue with its ultra-loose policy framework for a while yet, given that inflation remains so far away from its target. Still, all the talk about a potential tapering may have led investors to unwind some of their short-JPY speculative positions, leading to gains in the JPY. According to the latest CFTC commitment of traders report, JPY shorts are currently very high by historic standards.

In Europe, euro/dollar remained largely unfazed by headlines yesterday that Italy’s 5-Star Movement abandoned its pledge to leave the euro if Brussels did not accept to renegotiate some of the EU’s fiscal rules. Ahead of the looming Italian general election in March, this development alleviates some political uncertainty and could imply brighter skies ahead for the common currency.

In the commodity-linked currencies sphere, kiwi/dollar traded 0.2% higher while aussie/dollar was in the green too, albeit marginally. Dollar/loonie traded close to neutral territory despite the strong gains in oil.

Day ahead: UK manufacturing output expected; Riksbank minutes also due

Krona pairs could be gathering some attention as minutes from the Swedish Central Bank’s meeting on monetary policy will be made public at 0830 GMT.

UK manufacturing output figures for November due at 0930 GMT is likely to be the release gathering most attention during Wednesday’s European session trading. Month-on-month, manufacturing output expanded for the sixth straight month in October – the longest stretch in decades – spurring hopes that the British industry could be in for a strong performance in 2018 despite analysts predicting a slowdown in overall economic activity. Today’s reading on November manufacturing production will shed light on whether factories will continue to defy downbeat forecasts on the UK economy, with forex market participants placing their sterling positions accordingly. Data on industrial output and figures on the goods trade balance will also be watched. Those will be released alongside manufacturing output numbers.

Canadian building permits for the month of November are due at 1330 GMT, with US December import prices to be released at the same time. Data on US wholesale inventories are scheduled for release at 1500 GMT.

In policymakers’ appearances, Chicago Fed President Charles Evans and Dallas Fed President Robert Kaplan will be participating in discussions later in the day; Evans at 1400 GMT and Kaplan at 1410 GMT as well as at 1515 GMT. St. Louis Fed President James Bullard is scheduled to give a presentation on the US economy and monetary policy at 1830 GMT. Neither of the aforementioned is an FOMC voting member in 2018. Bank of England Deputy Governor Ben Broadbent will be answering questions on central bank policy on BBC radio at 1500 GMT.

The EIA report on US crude and gasoline stocks pertaining to the previous week is due at 1530 GMT. Crude oil inventories are expected to have declined by around 3.9 million barrels over the period of coverage. This compares to a drawdown of around 7.4m barrels in the week that preceded.

Technical Analysis: WTI oil futures rise to highest since May 2015; RSI overbought

WTI oil futures for February delivery hit 63.50 during today’s trading – their highest since May 2015 – after gaining 2.5% in Tuesday’s trading. Technical indicators are pointing to a bullish picture in the short-term: the Tenkan- and Kijun-sen lines are positively aligned and the RSI indicator has been rising over the last number of weeks. It should be noted though that RSI is in overbought territory above 70; a pullback in the short-term is not to be ruled out.

A larger-than-anticipated decline in crude stockpiles out of today’s EIA report could further boost prices, pushing them above 63.59, this being a more than 2½-year high that could be providing some resistance at the moment. Further above, round numbers – for example the 64.00 and 65.00 handles – could act as psychological barriers to additional bullish movement.

On the contrary, a smaller-than-projected drawdown in crude inventories could weaken prices. In this case, the area around the Tenkan-sen at 61.47 would come into view as potential support.

Downside pressure remains strong in the GBPUSD pair, as buyers failed to gain any traction above the 1.3550 resistance level. Recent intraday rallies in the pair towards the 1.3540 region have been sold-off, as price-action continues to support buying of the U.S dollar. Going forward a clear breach of the 1.3500-1.3550 price-range will determine the next short-term directional move in sterling. In the upcoming European trading session, the United Kingdom economy will release key Manufacturing and Industrial production figures for the month of December.

The GBPUSD pair remains bearish while trading below the 1.3550 technical level, a loss of the 1.3500 support region may lead to a strong sell-off towards the 1.3468 level.

Should price-action on the GBPUSD pair move above the 1.3550 level, buyers will likely push price upwards to test the 1.3585 and 1.3612 resistance levels.

The U.S dollar has moved to a new low against the Japanese yen, hitting 112.17 in early Wednesday trading, as mixed Chinese inflation figures and negative headlines from North Korea weigh on sentiment. The USDJPY pair has now pulled back slightly, with dip buyers testing the 112.30 resistance region, after intraday sellers failed to break the former price-low at 112.05. Downside price momentum in the USDJPY pair does however remain intact from Tuesday, with traders still likely to sell any rallies, after the BOJ scaled back buying on some longer-dated bond purchases.

The USDJPY pair remains strongly bearish while price-action trades below the key 112.30 level, sellers will likely be focused on the 112.05 and 111.68 downside levels.

Should the USDJPY pair start to hold price-action above the 112.30 level, buyers may try to move the pair toward the 112.70 and 112.88 resistance points.

The economic calendar is back in full swing on Wednesday, with the UK set to headline the release schedule with reports on manufacturing.

Action begins at 07:45 GMT with a report on French industrial production. Output in the French economy is projected to fall 0.5% in November, after rising 1.9% the previous month.

The UK Office for National Statistics will release its monthly manufacturing report at 09:40 GMT. The report is expected to show month-on-month growth of 0.3% in November, which translates into a year-over-year gain of 2.8%.

Industrial production – a broader measure of factory output – is expected to rise 0.3% from October and 1.8% annually.

The ONS will also report the November trade balance on Wednesday. Britain's goods trade deficit with the rest of the world is forecast to drop slightly to £10.7 billion from £10.781 billion. The trade deficit with non-European Union countries is expected to rise to £2.6 billion from £2.382 billion.

In a separate report on Wednesday, the National Institute of Economic and Social Research (NIESR) will provide a forecast of GDP for the three months ended December.

In the United States, a report on export and import prices will make headlines at 13:30 GMT. Later in the session, the Department of Commerce will report on wholesale inventories for the month of November.

Oil traders will also be monitoring the weekly crude inventory report courtesy of the US Energy Information Administration (EIA). The EIA is expected to show a weekly drawdown of 4.1 million barrels in the week ended 5 January, following a drawdown of 7.41 million barrels the week before.

In monetary policy, Federal Reserve Bank of Chicago President Charles Evans will deliver a speech at 14:00 GMT. The Fed will hold its next monetary policy meeting later this month. It will be the last meeting chaired by Janet Yellen.

EUR/USD

Europe's common currency consolidated on Tuesday following a sharp drop at the start of the week. The EUR/USD exchange rate was last seen trading at 1.1943 for a gain of 0.1%. The pair faces immediate support at 1.1890. On the opposite side of the spectrum, immediate resistance is located at 1.2000.

GBP/USD

Pound sterling was trading within a narrow range on Wednesday, as investors awaited fresh trading catalysts in the form of economic data. The GBP/USD exchange rate was last seen trading at 1.3534, where it was little changed. Cable is well supported at 1.3495, the low from the previous week. Resistance is likely found up ahead near 1.3600.

USD/JPY

The Japanese yen declined on Wednesday, as the dollar regained its composure following a series of heavy losses early in the week. The USD/JPY exchange rate fell 0.3% to 112.30. It now faces a support level of 112.10. On the opposite side of the ledger, resistance is likely found at 113.40.

After yesterday's surprise move by the Bank of Japan to reduce bond purchases, the Yen has continued its move against other currencies. GBPJPY, for example, is down -0.65%, trading at 151.556, adding to yesterday's move. Stops are being triggered in an unwind of the recent trend. Even the Japanese stock market is under pressure, with the Japan 225 down -0.36%, trading around 23777.00 for a second consecutive down day.

Chinese Consumer Price Index (YoY) (Dec) came in at 1.8% v 1.9% expected with a prior of 1.7%. Producer Price Index (YoY) (Dec) was 4.9% v 4.8% expected with the previous number of 5.8%. Consumer Price Index (MoM) (Dec) came in at 0.3% v 0.4% expected from a previous of 0.0%.

German Trade Balance s.a. (Nov) came out at 22.3B v an expected 20.9B, from a previous 19.9B. Exports (MoM) (Nov) were 4.1% v an expected 1.2%, from -0.4% previously that was revised up to -0.3%. Imports (MoM) (Nov) were 2.3% v 0.8% expected, from 1.8% prior. Current Account n.s.a. (Nov) was 25.4B v 25.5B consensus, from a previous of 18.1B. EURUSD moved higher after the data to test 1.19707 but sellers took price lower subsequently.

Swiss Real Retail Sales (YoY) (Nov) came in at -0.2% compared to a consensus of -2.5% and the previous number was -3.0%, but this was revised up to -2.6%. USDCHF moved higher when the data was published to test resistance at 0.88335.

Eurozone Unemployment Rate (Nov) was as expected at 8.7% v a prior of 8.8%. EURGBP sold off from 0.88254 to 0.88084 following the data release.

Canadian Housing Starts s.a (YoY) (Dec) was in at 217K v an expected 212.5K, from a prior of 252.2K which was revised to 251.7K. USDCAD sold off from 1.24438 to 1.24243 in reaction to this.

EURUSD is down -0.09% overnight, trading around 1.19253.

USDJPY is down -0.43% in the early session trading at around 112.157.

EURJPY is down -0.51% this morning, trading around 133.754.

GBPUSD is down -0.20% to trade around 1.35138.

USDCAD is up 0.08%, trading around 1.24731.

Gold is down -0.23% in early morning trading at around $1,309.37.

WTI is down -0.09%, trading around $63.35.

Major data releases for today:

At 09:30 GMT, UK Industrial Production (MoM) (Nov) will be released with an expected reading of 0.3% from a prior of 0.0%. Industrial Production (YoY) (Nov) consensus reading is 1.8%, with a prior of 3.6%. Manufacturing Production (MoM) (Nov) is expected to be 0.3%, with a previous reading of 0.1%. Manufacturing Production (YoY) (Nov) is expected at 2.8% from a prior of 3.9%. Traders of GBP pairs will be watching these data points closely.

Tentative – German 10-year Bond Auction. The previous auction's Interest Rate was 0.3%. EUR pairs may react to this data.

At 13:00 GMT, UK NIESR GDP Estimate (3M) (Dec) data will be released. The previous data came in at 0.5%. This data attempts to predict the Government's released data.

Tentative – US 10-Year Note Auction. The previous auction's interest rate was 2.384%. USD crosses could react to this data.

At 18:30 GMT, US FOMC Member Bullard will be speaking. This may affect USD crosses, stocks, commodities and bonds.

NZDUSD (0.7170):The New Zealand dollar was seen holding on to the gains with price briefly testing the support established at 0.7160. Price action has remained flat above this level and comes at a risk of a downside correction to 0.7062. However, the Stochastics oscillator is currently pointing to the bullish momentum being resumed. This could see NZDUSD sustained above the 0.7160 handle. Assuming the sharp rising wedge pattern is validated, we could expect to see some downside correction taking place

USDJPY (112.31):The USDJPY also extended losses yesterday with price action falling close to the 112.04 level of support. Currently, we notice a rebound in prices but, the bearish momentum is likely to see price eventually retest the familiar support level. Price action in USDJPY remains flat at the moment unless we see a breakdown of the support level. In this case, USDJPY could be seen testing the lower support near 111.50 area. To the upside, a rebound off the 112.04 support could keep prices continuing to trade sideways.

EURUSD (1.1938):The EURUSD extended declines for the third consecutive day. Price action posted a reversal after falling to a two week low. However, we expect the declines to continue towards the 1.1900 handle as mentioned previously. To the upside, the gains are limited to the 1.2000 handle where resistance could be formed following a brief spell of this level serving as support.

The U.S. dollar was seen extending it's gains from the previous day. The lack of economic data on the day saw the markets focusing on rumors that the Bank of Japan could be reducing its bond purchases. The Japanese yen strengthened significantly across the board, rising 0.34% on the day. The U.S. dollar was the second best performing currency pair on Tuesday.

Data from the Eurozone showed that the unemployment rate fell to 8.7% as forecast. The unemployment rate was better than the previous month's 8.8%. However, the common currency continued to extend losses.

Looking ahead, data from the UK stands out with the manufacturing, industrial and construction output data. Overall, output from all the three sectors is expected to show a modest improvement from the previous month. In the U.S. the import price data is expected to show a 0.4% increase, which is slower than the previous month.