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Distortion in CPI data expected

The US dollar has reversed gains as investors' confidence in Trump's tax reform fell again. After sliding as much as 1.50% since the beginning of the week, the dollar index consolidated slightly above 93 on Friday morning. However the week is far from over, the market is awaiting the release of fresh inflation data. Investors have revised their inflation expectations to the upside in September. Median forecasts for the headline measure inched up to 2.3%y/y, compared to a print of 1.9% in the previous month, in anticipation of side effects from the series of storms that hit the US during the month of September. Core inflation is expected to have risen but in to a smaller extend as investors anticipate it will print at 1.8%, up from 1.7% in August.

After contracting 0.2%m/m in August, retail sales are expected to have picked up in September with median forecast standing at 1.7%m/m. Retail sales excluding auto and gas should also recover with markets anticipating a pick-up of 0.4%m/m. Similarly, the impact of Hurricane Harvey will significantly impact the data. The challenge is to filter out its effects, an almost impossible task given the effects result from a broad range of factors as it distorted the demand for various goods and services and also impacted the oil production along the Gulf Coast.

Since even the core measure is anticipated to be biased, the investors will take the report with a grain of salt. The key USD driver at the moment will remain the upcoming rate hike, which will probably take place in December, and Trump tax reform. Neither is a done deal and by far. Against such a back, further dollar weakness has to be seriously considered. However in the medium-term, we remain dollar positive.

Brexit negotiations: Tensions are coming back

Brexit Negotiations are back into centre stage. The EU 27 Leaders are meeting today in Brussels to discuss about the further trade agreement with the UK. This promises to be intense as 27 Countries that must agree seems like a very difficult task. It is obvious that each one of the EU members does not have the same interest and the same relationship with the UK which will are making the overall EU position on trade relations very fragile.

We do not believe that the 'No deal' will be the final conclusion of the Brexit negotiations. We rather believe that the lack of unity within the European Union will benefit to the UK. The EU are definitely trying to play tough by blocking trade talks by asking the UK to first secure three main points: a guaranteed citizens right for EU citizens, a cash settlement of around 10 billion pounds and the Northern Ireland Border.

The 'No deal' issue which we consider a lose-lose scenario is however not likely according to us. In our view, EU economic difficulties (massive debt, Greek issues, immigration) will definitely help UK achieving an agreement. Catchphrases from both sides are definitely driving tensions higher.

MXN to weaken further

The Ottawa round of NAFTA negotiation have turned nasty. The first causality has been the driving ethos of globalizations and cooperation, replaced with strong protectionist bias. In this negative environment, missteps were bound to occur. MXN was rocked (despite of wide spread EM strength) as news that Mexico's Finance Minister Meade was developing trade alternatives and tariff measures in case the NAFTA negotiations disintegrated. In additions the US assistance of inclusion of a 'sunset clause' that would allow for the agreement renegotiation every five years. Rumors have plagued discussions that Trump was having side conversations with Canadians Trudeau on potential bilateral agreements.

All side quickly dismissed the 'fake' news saying it was critical to secure a multilateral agreement between all three nations. However, the optics of smiling Trudeau and grimacing Meade are telling. In our view, the probability of the full blow break up of NAFTA has increased significantly. Further MXN depreciation is expected, as markets has not incorporate fully the necessary risk premium. Breaking up NAFTA was a popular theme on Trump campaign and remains an area he has near total control over. USDMXN break of 200d MA suggest extension of bullish momentum towards triple top resistance at 19.25.

• US inflation data could hold the key to December Fed rate hike;
• Oil surges as China reports second highest crude imports.
• It's been a relatively calm week for financial markets and yet, with indices continuing to trade at record highs there is plenty of reason for optimism.

With the global economic outlook improving all the time, central banks have a new and equally difficult challenge on their hands, unwinding years of unconventional monetary stimulus and adapting to what has become known as the new norm. The Federal Reserve has been very much ahead of the curve on this and continues to lead the way, with interest rates having risen four times over the last two years and at least a few more pencilled in over the coming year or so.

Just as the Fed first went into quantitative easing blind, the return to normalisation has been far from conventional or straightforward and it seems policy makers are nearing an impasse, with a growing number becoming increasingly uncomfortable with raising interest rates. The problem with raising interest rates on the expectation that inflation will rise towards target due to an apparent tightness in the labour market, is that when the results take longer to materialise than first thought, policy makers will naturally doubt the models being used and whether more damage than good is being done.

With that clearly evident from the recent FOMC minutes and numerous Fed speakers we've heard from in recent weeks, today's inflation data is going to be monitored very closely for signs of price growth. The CPI reading is forecast to jump quite a bit this month, from 1.9% to 2.3%, but this is expected to reflect short-term effects, such as higher fuel prices. The core reading is also expected to rise, but a much more modest 0.1%, from 1.7% to 1.8%. While these may appear much nearer target than has been made out, it's worth noting that the CPI number is not the Fed's preferred measure of inflation but it is released a couple of weeks before the core PCE price index and therefore is followed closely for signs of price pressures building or declining.

Retail sales data will be released alongside the CPI numbers today which could make things quite volatile ahead of the open. Consumer spending is a crucial component of the US economy and something that has underwhelmed throughout the recovery and has been on a downward trajectory this year. A big spike is expected this month but once again this is likely to be a temporary bounce.

Higher oil prices are helping to drive gains in equity markets on Friday, with Brent and WTI crude both up around 2% on the day. While Donald Trump's speech later on Iran and the possibility of renewed sanctions may be supporting prices, the move is likely more down to the trade data from China and the inventory numbers on Thursday, both of which are bullish for oil. A larger than expected drawdown reported by EIA, after API reported a more than three million barrel build on Wednesday, pointed to further rebalancing in the oil markets.

This was followed overnight by China reporting the second highest ever monthly crude imports in September. Higher than expected demand and rising forecasts for demand growth next year are helping to reduce the global oversupply and aid producers in their bid to return stocks to their five year average.

The DAX is showing little movement in the Wednesday session. Currently, the index is at 12,988.50, up 0.04% on the day. On the release front, there is only one event out of the eurozone. German Final CPI posted a small gain of 0.1%, matching the forecast.

The ECB will hold a critical policy meeting on October 26, but any hopes of a rate hike were dashed on Thursday by Mario Draghi. The ECB President stated that he plans to maintain ultra-low rates “well past” the end of its bond-buying program in December. The ECB has been under pressure to tighten monetary policy, primarily from Germany, where the central bank has called for tighter policy, given the stronger eurozone economy. The ECB is expected to taper its monthly bond purchases of 60 billion euros at the October policy meeting, but Draghi has sent out a clear message that rate hikes will have to wait until 2018. With inflation levels will below the ECB target of around 2 percent, Draghi has been reluctant to raise interest rates until inflation shows clear signs of moving upwards.

Spain’s constitutional crisis continues to rock the country. Earlier in the week, Catalan President Carles Puigdemont declared Catalonia’s independence, but then suspended the move, saying he wants talks with Madrid. However, Spanish Prime Minister Mariano Rajoy is in no mood to chat, and gave Puigdemont eight days to retract his declaration of independence. Otherwise, Rajoy has threatened to suspend the Catalan parliament and impose direct rule from Madrid. The Spanish government has the backing of France, Germany, and other European Union members, and Catalonia itself appears evenly divided on independence. With both sides entrenched in their positions, the crisis is set to continue into next week. The crisis could take a toll on the Spanish economy, as several banks and large corporations have said they will move their legal headquarters out of Catalonia. The EU has refused to mediate, and is treating the issue as a domestic Spanish matter.

The euro is unchanged in Friday trading. Currently, EUR/USD is trading at 1.1829, down 0.01% on the day. On the release front, German Final CPI came in at 0.1%, matching the forecast. Traders should be prepared for some movement from the pair in the North American session, as the US releases CPI and retail sales reports. The US will also release UoM Consumer Sentiment.

The Federal Reserve minutes from the September meeting appeared to confirm that a December rate increase is on the way. The minutes showed that many policymakers felt that a December hike “was likely to be warranted”. However, some policymakers remain concerned about low inflation levels and said that inflation would be a consideration in their decision on a rate hike. The odds of a December hike have increased dramatically in the past few weeks, mostly in response to Fed Chair Yellen and other FOMC members expressing optimism that inflation will move upwards. On Wednesday, Kansas City Fed President Esther George went event further, saying that low inflation did not pose a problem, as the US economy was strong and the labor market was at full capacity. Investors will be carefully monitoring Friday’s CPI reports as well as the Fed reaction. Currently, fed futures have priced in a December hike at 87 percent.

Did he or didn’t he? That is the question that Spanish Prime Minister Mariano Rajoy has demanded of Catalan President Carles Puigdemont, who last week declared Catalonia’s independence, but then suspended the move. On Wednesday, Rajoy gave Puigdemont eight days to reply and has threatened to suspend the Catalan parliament if indeed the regional government declared independence. The Catalan leader says he wants to negotiate with Madrid, but Rajoy has refused, saying session is illegal. The Spanish government has the backing of France, Germany, and other European Union members, and Catalonia itself appears evenly divided on independence. With both sides entrenched in their positions, the crisis is set to continue into next week. The crisis could take a toll on the Spanish economy, as several banks and large corporations have said they will move their legal headquarters out of Catalonia. The EU has refused to mediate, and is treating the issue as a domestic Spanish matter.

ECB President Mario Draghi said on Thursday that he plans to maintain ultra-low rates “well past” the end of its bond-buying program in December. The ECB has been under pressure to tighten monetary policy, primarily from Germany, where the central bank has called for tighter policy, given the stronger eurozone economy. The ECB is expected to taper its monthly bond purchases of 60 billion euros at its policy meeting on October 26, but Draghi has sent out a clear message that rate hikes will have to wait until 2018. With inflation levels will below the ECB target of around 2 percent, Draghi has been reluctant to raise interest rates until inflation shows clear signs of moving upwards.

Crude oil is consolidating within a range defined by the support at 50.43 and the hourly resistance at 51.23. Key support is given at 45.40 (17/08/2017 high). Strong resistance lies at 52.86 (28/09/2017). Expected to show continued weakness.

In the long-term, crude oil has recovered after its sharp decline last year. However, we consider that further weakness are very likely. For the time being the pair lies in an upside momentum. Strong support lies at 35.24 (05/04/2016) while resistance can now be found at 55.24 (03/01/2017 high).

Silver has further improved as can be seen by the move above the resistance at $17.25. The precious metal is now trading above $17. Hourly support can be found at 16.13 (06/10/2017 low). Expected to show further increase.

In the long-term, the trend is rater negative. Further downsides are very likely. Resistance is located at 25.11 (28/08/2013 high). Strong support can be found at 11.75 (20/04/2009).

Gold has broken downtrend channel precious metal that drove the precious metal from 1357 to hourly support given at 1267 (15/08/2017 low). Strong support lies at a distance at 1204 (10/07/2017 high). Expected to show further upside move.

In the long-term, the technical structure suggests that there is a growing upside momentum. A break of 1392 (17/03/2014) is necessary ton confirm it, A major support can be found at 1045 (05/02/2010 low).

Bitcoin is definitely on a strong momentum. Strong support is given at 2975 (22/08/2017 low). Sell walls around $4000 have been broken. Bitcoin si ready to set up new all-time high. The road is wide open for further increase.

In the long-term, the digital currency has had an exponential growth. There are decent likelihood that the asset will reach $10'000.

EUR/CHF has broken to the upside of its channel range. Strong resistance lies at a distance at now at 1.1623 (22/09/2017 high). Support is given at 1.1388 (02/09/2017 low). Downside risk is very likely.

In the longer term, the technical structure has reversed. Strong resistance is given at 1.20 (level before the unpeg). Yet, the ECB's QE programme is likely to cause persistent selling pressures on the euro, which should weigh on EUR/CHF. Supports can be found at 1.0184 (28/01/2015 low) and 1.0082 (27/01/2015 low).

EUR/GBP drifting high but well within recent ranges. The pair has broken the resistance at 0.8899 (19/09/2017 low). The very short-term technical structure is biased to the upside. Hourly support is given at 0.8906 (09/10/2017).

In the long-term, the pair has largely recovered from recent lows in 2015. The technical structure suggests a growing upside momentum. The pair is trading above from its 200 DMA. Strong resistance can be found at 0.9500 (psychological level).