Sample Category Title

Daily Pivots: (S1) 113.75; (P) 114.01; (R1) 114.43; More...

Intraday bias in USD/JPY remains neutral as consolidation from 114.44 is still in progress. Another fall cannot be ruled out. But after all, near term outlook will remain cautiously bullish as long as 111.64 support holds. Decisive break of 114.49 key resistance will confirm that correction pattern from 118.65 has completed at 107.31 already. And USD/JPY should then target a test on 118.65. However, sustained break of 111.64 will argue that rebound from 107.31 has completed and bring retest of this low.

In the bigger picture, medium term rise from 98.97 (2016 low) is not completed yet. It should resume after corrective fall from 118.65 completes. Break of 114.49 resistance will likely resume the rise to 61.8% projection of 98.97 to 118.65 from 107.31 at 119.47 first. Firm break there will pave the way to 100% projection at 126.99. This will be the key level to decide whether long term up trend is resuming.

Daily Pivots: (S1) 1.3216; (P) 1.3268; (R1) 1.3297; More....

GBP/USD rebounded strongly from 1.3068 but overall outlook is unchanged. Price actions from 1.3026 are seen as forming a consolidation pattern. Further rise and break of 1.3337 cannot be ruled out. But upside should be limited by 61.8% retracement of 1.3651 to 1.3026 at 1.3412 to bring fall resumption finally. On the downside, firm break of 1.3026 support will resume the decline from 1.3651 and target 1.2773 key support level. This will also revive the case of medium term reversal. However, sustained break of 1.3412 will turn focus back to 1.3651 high.

In the bigger picture, while the medium term rebound from 1.1946 was strong, GBP/USD hit strong resistance from the long term falling trend line. Outlook is turned a bit mixed and we'll stay neutral first. On the downside, decisive break of 1.2773 key support will argue that rebound from 1.1946 has completed. The corrective structure of rise from 1.1946 to 1.3651 will in turn suggest that long term down trend is now completed. Break of 1.1946 low should then be seen. On the upside, break of 1.3835 support turned resistance will revive the case of trend reversal and target 38.2% retracement of 2.1161 (2007 high) to 1.1946 (2016 low) at 1.5466 .

Dollar weakens broadly after FOMC rate decision that provides little news to the markets. Instead, traders are keen awaiting US President Donald Trump's announcement on nominating Fed Governor Jerome Powell to take over Fed chair job next year. The announcement is expected at 3pm New York Time today. Also, after a day of delay, House is set to reveal the details of the tax bill. But the greenback could continue to stay in range and wait for tomorrow's non-farm payroll report. Meanwhile, Sterling remains the strongest one for the week as markets await the highly anticipated BoE rate hike.

As widely anticipated, the November FOMC meeting contained few changes from the previous one. The members left the target range of the Fed funds rate unchanged at 1-1.25%. One surprise came from the upgrade of the growth assessment to 'solid' for the first time since 2015, despite disruptions by hurricanes. Inflation stayed below the 2% target and the members acknowledged that core inflation 'remained soft'. However, the encouraging growth outlook and further decline in the unemployment rate suggest that a December rate hike remains on track. More in FOMC Upgraded Growth Assessment First Time In Two Years, December Hike On Track

Also on FOMC:

• FOMC Review: Overshadowed by Fed Chair Announcement Tomorrow
• Few Changes from the Fed as December Hike Appears on Track
• Fed Holds the Line on Rates in November
• Few Surprises from the FOMC

House Ways and Means Committee Chairman Kevin Brady said yesterday that Republicans will "definitely" reveal the details of the tax bills today. Brady also hinted on a phased approach on tax cuts for businesses. Responding on questions of whether the cuts are permanent Brady said that "that's our goal, and I think it's going to take several steps through the process to achieve that." But it's believed that the purpose of the phased approach is to get around with Senate budget rules and Democratic filibuster.

BoE to hike for the first time in a decade

BoE is widely expected to hike interest rate for the first time in a decade. The Bank Rate would be raised by 25bps to 0.50%. The core question is whether this is a one-off hike. In our view, it will be a one-off as the Bank Rate will be brought back to pre-Brexit referendum level. The impact of the voting decision is largely absorbed by the monetary stimulus as well as depreciation in Sterling. BoE policy makers would hesitate to make any more move before getting a clearer picture on Brexit. With that in mind, the vote split of the decision is the first key point to watch. The tighter the decision, the more unlikely for another hike in near term. In addition, BoE will release the quarterly inflation report. Revision in inflation projection there will tell us how policymakers general feel about the recent surge in inflation.

ECB Hansson: Tapering a minor issue

ECB Governing Council Member Ardo Hansson said yesterday that tapering the asset purchase is a "minor issue" for the central bank. He noted that "How we move in the future ... to zero, is a very minor issue in the context where the stock of accumulated purchases is already in the trillions of euros." And, "so the question about 10 billion euros there or the precise phasing, I think is not really a material issue". That is taken by a sign by some that ECB could be moving the policy focus away from asset purchases. That is, the central bank will put more emphasis on tools like interest rates, or forward guidance.

Japan PM Abe undecided yet on next BoJ head

In Japan, the question on whether BoJ Governor Haruhiko Kuroda would be given another five year term next year is still unanswered. Prime Minister Shinzo Abe expressed his recognition on Kuroda's achievements. He said that "we have created a situation in a short period of time that Japan is no longer in deflation as a result of strengthening policy coordination between the government and the BOJ." And, "the government and the BOJ have achieved a major result on employment, which is the most important responsibility of politics." But he also noted he had "no decided at all" on who will lead BoJ after Kuroda's term expires next April.

On the data front

Australian Dollar rebounds notably today after positive economic data. Trade surplus widened to AUD 1.75b in September, above expectation of 1.2b. Building approvals rose 1.5% in October versus expectation of -1.0% fall. Japan monetary base rose 14.5% yoy in October.

Swiss will release retail sales and SECO consumer confidence and retail sales in European session. Eurozone will release PMI manufacturing revision and German unemployment. UK will release construction PMI but focus will be on BoE rate decision and inflation report.

From US, jobless claims, Challenger job cuts and non-farm productivity will be featured.

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.3216; (P) 1.3268; (R1) 1.3297; More....

GBP/USD rebounded strongly from 1.3068 but overall outlook is unchanged. Price actions from 1.3026 are seen as forming a consolidation pattern. Further rise and break of 1.3337 cannot be ruled out. But upside should be limited by 61.8% retracement of 1.3651 to 1.3026 at 1.3412 to bring fall resumption finally. On the downside, firm break of 1.3026 support will resume the decline from 1.3651 and target 1.2773 key support level. This will also revive the case of medium term reversal. However, sustained break of 1.3412 will turn focus back to 1.3651 high.

In the bigger picture, while the medium term rebound from 1.1946 was strong, GBP/USD hit strong resistance from the long term falling trend line. Outlook is turned a bit mixed and we'll stay neutral first. On the downside, decisive break of 1.2773 key support will argue that rebound from 1.1946 has completed. The corrective structure of rise from 1.1946 to 1.3651 will in turn suggest that long term down trend is now completed. Break of 1.1946 low should then be seen. On the upside, break of 1.3835 support turned resistance will revive the case of trend reversal and target 38.2% retracement of 2.1161 (2007 high) to 1.1946 (2016 low) at 1.5466 .

Economic Indicators Update

Key Points:

• Brent tops $60.00 a barrel.
• Saudi Oil Minister suggests production cuts to be extended.
• Shale oil production likely to be stood up in the coming weeks.

The past few weeks have seen crude oil prices surging as plenty of rhetoric, along with some fundamental bumps, have buoyed the commodity. Subsequently, both WTI and Brent prices have reached levels not seen since the latter part of 2016. In particular, the price of Brent has risen above the mythical $60.00 handle and looks to be gaining steam for additional gains in the coming days. However, it remains to be seen if prices can retain their buoyancy above what some in the market consider being an advantageous level for shale production stand ups.

Subsequently, you would be forgiven for questioning the sustainability of the recent rally given that the U.S. shale oil industry is presently hanging over the market like a hammer. The $60.00 handle has long been seen as the marginal profit level for even the high cost American shale producers which suggests that we could see some significant increases in rig counts and production as prices exceed this level. So you would be forgiven for expecting Brent and WTI prices to start falling any moment.

However, as always within energy markets, there are multiple variables at play impacting the commodity. Subsequently, last week's rhetoric from the Saudi Oil Minister on extending the production cuts has been met with plenty of bullishness as the markets grapple with to what extent OPEC is able to impact world prices on a long term basis. Additionally, U.S. crude inventories, along with the rig count actually declined in the past day which certainly provides some contradictory signals.

Regardless, the reality is that any rally is likely to be defeated by increasing U.S. shale production over the medium term until a total rebalancing of crude markets is completed. Also, the actual compliance with the OPEC production caps is slowly declining as domestic economies feel the pinch of reduced sales. Subsequently, if compliance continues to decline we could see further fracturing amongst various OPEC member states and this means lower oil prices in the short-medium term.

Ultimately, there is plenty of more pain to come for producers within the Crude Oil sector and the recent topping of prices simply puts us back to square one with the ongoing need to rebalance supply. The most likely scenario that we see for the near term is for Brent to range between $54.00 - $57.00 a barrel as we move towards the winter season. However, keep a close watch on the commodity because, regardless of any buoyancy, prices will still need to come down in the long term prior to stabilising.

The Canadian dollar gained on Wednesday after the U.S. Federal Reserve ended its two day Federal Open Market Committee (FOMC) meeting and left the benchmark borrowing rate untouched at 100–125 basis points. The move was expected by the market with investors looking ahead to the December meeting for a third rate hike in 2017.

The loonie gained back some of the losses in the week, but it still down 0.49 in a weekly basis. The Canadian currency reached a high after the surprise rate hike by the Bank of Canada (BoC) on September 6 took the benchmark interest rate back to 1.00 percent. Governor Poloz had proactively cut twice in 2015 to help the Canadian economy withstand the fall in oil prices. With a more stable energy market and a strong economic growth the BoC withdrew that stimulus.

The contraction of Canada's monthly GDP by 0.1 percent in August had been foretold by various indicators. The Canadian economy was slowing down and the tone of the central bank was changing from the hawkish tone seen in the summer.

Growth in the United States in the meanwhile has been strong with the only concern for the Fed the persistent low inflation. It is that inflation that divides the FOMC ahead of the December meeting. The Fed has surprised this year by ditching the cautious script from years past and into a more proactive role. Chair Yellen has said that at this point waiting on raising rates could be more harmful. The December rate hike could end up being the last monetary policy action from Yellen. She is not a favourite to retain her Chair position. The Fed's Jerome Powell and Stanford's John Taylor are now in the lead, with the scenario of one become Vice Chair and the other Chair a growing possibility.

The USD/CAD lost 0.11 percent on Wednesday. The currency is trading at 1.2870 after the Federal Open Market Committee (FOMC) statement saw the Fed hold interest rates again. The lack of new information on what the Fed will do on December make it easier for the loonie to recover some of the lost ground.

Canadian manufacturing showed more signs of slowdown. Manufacturing PMI fell to 54.3 and is now the lowest it has been since January. The reading is still above 50, which is the gauge of growth. Weather related shortages in the United States affected Canadian companies.

Oil prices fell slightly in the last 24 hours. The price of West Texas Intermediate is trading at $54.06 on a day with see-saw trade action after the American Petrol Institute released on Tuesday night had created anticipation around a 5.1 million barrel drawdown. The Energy Information Administration (EIA) weekly crude inventories showed a larger than forecasted 2.4 million barrels but still short of the API shortfall which prompted a correction in prices.

The cuts to production agreed by Organization of the Petroleum Exporting Countries (OPEC) and other major producers have achieved stability in the oil market and the promise of extending those cuts have taken oil prices to mid 2015 levels. Doubts still remain on how much demand has really recovered. The stability in prices can be easily disrupted as soon as the US shale industry shakes off the effects of the hurricane season and increases the rig count to take advantage of the rising price of crude.

Market events to watch this week:

Thursday, November 2
5:30 am GBP Construction PMI
8:00 am GBP BOE Inflation Report
8:00 am GBP MPC Official Bank Rate Votes
8:00 am GBP Monetary Policy Summary
8:00 am GBP Official Bank Rate
8:30 am GBP BOE Gov Carney Speaks
8:30 am USD Unemployment Claims
8:30pm AUD Retail Sales m/m
Friday, November 3
5:30 am GBP Services PMI
8:30 am CAD Employment Change
8:30 am CAD Trade Balance
8:30 am CAD Unemployment Rate
8:30 am USD Average Hourly Earnings m/m
8:30 am USD Non-Farm Employment Change
8:30 am USD Unemployment Rate
10:00 am USD ISM Non-Manufacturing PMI

As widely anticipated, the November FOMC meeting contained few changes from the previous one. The members left the target range of the Fed funds rate unchanged at 1-1.25%. One surprise came from the upgrade of the growth assessment to 'solid' for the first time since 2015, despite disruptions by hurricanes. Inflation stayed below the +2% target and the members acknowledged that core inflation 'remained soft'. However, the encouraging growth outlook and further decline in the unemployment rate suggest that a December rate hike remains on track.

Policymakers upgraded the growth outlook and shrugged off the impacts of hurricanes. As noted in the accompanying statement, 'economic activity has been rising at a solid rate despite hurricane-related disruptions. Although the hurricanes caused a drop in payroll employment in September, the unemployment rate declined further'. In September, they noted that that economic activity has been 'rising moderately so far this year. Job gains have remained solid in recent months, and the unemployment rate has stayed low'. Recognizing growth as 'solid' for the first time in 2 years signaled that Fed's confidence in the economic firm-footing. In shorts, the members were not concerned about the hurricane-related disruptions. They believed that 'rebuilding will continue to affect economic activity, employment, and inflation in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term'. At the same time, the Fed acknowledged the weakness on inflation, although hurricanes had boosted gasoline prices, which in turn lifted headline inflation in September. The members indicated that 'inflation for items other than food and energy [core inflation] remained soft'. They noted that CPI measures 'have declined this year and are running below +2%'. On net, the Fed continued to characterize the near-term risks to the economic outlook as 'roughly balanced', and it would continue 'monitoring inflation developments closely'.

A highlight of the meeting was the update of the balance sheet reduction program which took effect in October. However, there was only brief touch on this issue. The statement suggested that balance sheet normalization was 'initiated' in October and 'is proceeding'. There were no dissents. Last month, the Fed began the process of reducing its US$ 4.5 trillion balance sheet which is comprised mainly of bonds. In the plan announced in June, the Fed set an initial cap at US$ 10B/month. That is, the caps start for the first three months at US$6B and US$4B for Treasuries and MBS respectively, before rising each quarter until they reach US$30B and US$20B per month Treasuries and MBS respectively, by October 2018.

The November statement signals that the Fed is on track to raise the policy rate again in December, assuming no material deterioration of the economic development. The next focuses are the announcement of the next Fed chair (US President Donald Trump has intended to announce it Thursday US Time), a drafted tax reform bill and the November employment report due Friday.

As expected, the Fed decided to maintain the target range at 1.00%-1.25% at this meeting.

Also as expected, there were no major changes to the statement. As expected, the Fed still says that it is monitoring inflation closely. The Fed says that the dip in employment in September was due to hurricanes and, as it has previously said, it will not put too much weight on negative economic data caused by hurricanes. The reason is that it thinks it is temporary - a view we share.

It remains our base case that the Fed hikes again in December (in line with market pricing and consensus) and twice next year. However, it is difficult to forecast what the Fed is going to do next year, as we still do not know the new 'team' yet.

The meeting is overshadowed by the fact that President Trump is likely to announce the next Fed chair tomorrow "afternoon" (US time, so likely tomorrow night CET). It remains our base case that current Fed governor Powell is going to succeed Yellen. Powell is a 'status quo' candidate in the sense that he is considered to be a centrist like Yellen and he will most likely continue the current monetary policy strategy of gradual Fed hikes. Still, we could see a slightly dovish reaction to a Powell nomination, as we cannot rule out that Trump is going to nominate John Taylor instead, who has said he thinks US monetary policy is too easy at the moment.

Note that the Republicans are now expected to unveil the long-awaited tax plan tomorrow (likely around 14:00 CET). Originally, it was planned to be unveiled today but it was postponed due to internal disagreement between Republicans. US tax reform has become more likely after House Republicans have accepted that tax reform will be deficit-financed. That said, one problem is that the current proposal is likely too expensive given that the Republicans have only made room for a total of USD1,500bn tax cuts over 10 years.

Our Take:

The Fed once again showed no inclination to change monetary policy at a non-press-conference meeting, holding the fed funds rate in a 1.00-1.25% range as expected. The updated policy statement was plain vanilla with a nod to some transitory hurricane effects - higher inflation and lower employment - and a decent Q3 growth outturn despite weather-related disruptions. The usual themes of a strong labour market and soft inflation were unchanged, with the latter still expected to hit the Fed's 2% objective over the medium term.

There was no overt signal in today's statement that the Fed is set to raise rates in December, but we don't think that should dent the odds of such a move. The Fed's forecasts from September remain largely on track. If anything there is a bit of upside to their GDP forecast for the current year after Q3 growth held up at 3%. Inflation continues to be disappointing but is not far from what the Fed has penciled in for the end of the year. All told, we see little reason for the 12 of 16 FOMC members who thought another rate hike would be warranted by end of year to change their minds. Markets are of the same view with a December rate increase almost fully priced in.

We continue to think steady but gradual rate hikes are in store next year, though the Fed's 'dot plot' shows a wide range of views on how much tightening is appropriate. And a change in Fed leadership - possibly being announced as early as tomorrow - only adds to uncertainty about the future path of monetary policy.

As expected, the Federal Open Market Committee (FOMC) left rates on hold at a target range of 1 to 1-1/4 percent.

The statement noted the disruptions to economic activity and inflation caused by the late-summer hurricanes. Outside of this, the overall economic outlook remained unchanged, the labor market continues to strengthen, but inflation remains "soft" and below its 2% target.

Key Implications

There is very little to comment on in this statement. As broadly expected, the Fed held the line on rates and noted, once again, the dilemma between a strengthening economy and stubbornly weak inflation.

The inflation outlook will be central to the conduct of monetary policy over the next year. As some of the idiosyncratic factors weighing on price growth diminish, and the unemployment rate continues to push further below its natural rate, inflation is likely to gain traction in the year ahead. The Fed should see enough evidence for this proposition when it meets next in December, allowing them to raise rates by 25 basis points.

The Fed touted better growth but the FOMC statement reiterated concerns about low inflation. The New Zealand dollar was the top performer after solid jobs figures, while the Swiss franc lagged. Australian trade balance is due next followed the BoE decision on Thursday. 2 GBP and 1 FTSE trades are in progress.

The Fed decision was a bit of a dud in terms of market moves. The initial reaction was to sell the US dollar as the Fed indicated inflation has declined this year but it quickly rebounded on an upgrade in the growth assessment to 'solid' from 'moderate'.

USD traders now shift to Thursday's tax plan. A Congresswoman said the details will be released at 9 am ET (1300 GMT). The drawback to much details is disappointment. Political spin is sure to come from deficit hawks. The grandstanding will be intense and that might prompt a move to safe havens.

The other US news to come on Thursday will be the Fed chair decision. However, a late-breaking report says Powell has been told the job is his. That decision was mostly priced in and the attention will now turn to his comments during confirmation and signals on future hikes.

Before that, data on Australian trade balance is due at 0030 GMT. The consensus is for a surplus of A$1.2B and any miss could send another jolt through AUD trading.

The bigger market mover will be the Bank of England decision. The market is pricing in a 90% chance of a hike so the bigger driver will be signals about what's next. The BoE Minutes will show the extent of unanimity, the BoE inflation report should enlighten on inflation and growth revisions and forecats, while Carney's testimony never disappoints.
Plenty of market watchers are talking about a one-and done but the market is pricing in a 37% chance of a second hike in February. That's a low bar. Carney could sound his usual neutral stance, but if he's constructive about growth then it would leave the door open for that second hike.