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XAUUSD (1296.37): Gold prices are seen attempting to rally after clearing the resistance level of 1290 - 1288. Further upside in the price action could keep gold prices on track to test the next major resistance level that comes in at 1324 - 1320 region. However, the recent gains in gold prices off the lower support at 12262 signals a possible ascending wedge pattern. A potential breakout from this level, below 1288 - 1290 could signal a downside breakdown in prices. This will bring gold prices back to the 1275 - 1273 support and eventually towards 1262 support to complete the downside correction.

USDJPY (112.09): The USDJPY has been trending lower following the brief consolidation seen near the falling trend line. Price action has been edging lower after trading flat within the resistance level of 113.00 and support level of 111.74. We expect this range to be maintained in the near term with USDJPY likely to see a modest bounce off the support. However, in the event of a break down below 111.74, we can expect further declines to push USDJPY lower towards the support level of 111.00 - 110.88 region where the next main support level resides.

EURUSD (1.1848): The EURUSD was bearish yesterday but with price action rallying above the support area of 1.1843 - 1.1822 the declines are likely to be limited. In the overnight session, the EURUSD was seen falling back into the support level and currently attempting to push higher. A convincing close above this support area is required to build confidence to the upside. Price action could be targeting the unfilled gap at 1.19448 as a result. However, in the event of price failing to hold the gains, we could expect the downside risks building up. Lower support at 1.1720 comes back into focus with a potential for EURUSD to post further declines on a break down below 1.1688

The US dollar was trading rather mixed, coming out strongly against the euro was seen trading rather flat against the yen and the British pound. Economic data released yesterday showed that the weekly unemployment claims fell sharply, rising just 243k against estimates of 251k while producer price index data rose 0.4% on the month as expected. The PPI data raised expectations that consumer prices could also rise in the near term.

FOMC members Powell and Brainard along with ECB President Mario Draghi gave their views on monetary policy. The ECB President sounded cautious as he said that the central bank would remain accommodative.

Looking ahead, the main focus for today will be the US consumer prices index data for the month of September. According to the economists polled, headline CPI is expected to rise 0.6% on the month and rise above 2% on a year over year basis. Core CPI is expected to rise 0.2% on the month, maintaining a steady pace of gains. US retail sales numbers are also expected with forecasts showing a bullish print.

Daily Pivots: (S1) 0.8877; (P) 0.8954; (R1) 0.8995; More...

The sharp decline from 0.9032 argues that rebound from 0.8745 could have completed. Intraday bias in EUR/GBP is turned back to the downside for 0.8745. Break there will resuming the whole fall from 0.9305 towards 0.8303/12 key support level. On the upside, above 0.9032 will resume the rebound from 0.8745 through 61.8% retracement of 0.9305 to 0.8745 at 0.9091 for retesting 0.9305.

In the bigger picture, there are various ways to interpret price actions from 0.9304 high. But after all, firm break of 0.9304/5 is needed to confirm up trend resumption. Otherwise, range trading will continue with risk of another fall. And in that case, EUR/GBP could have a retest on 0.9303 low. But we'd expect strong support from 0.8116 cluster support (50% retracement of 0.6935 to 0.9304 at 0.8120) to contain downside.

Much volatility was seen in Sterling in the past 24 hours on news regarding Brexit. British Pound suffered steep selling yesterday on news that the fifth round of Brexit negotiations ended with "deadlocks" on the issue of the divorce bill. Nonetheless, Sterling was quickly popped up by reports that UK could get a 2-year Brexit extension. A German newspaper Handelsblatt quoted unnamed source that EU could give that extension to UK under the conditions that the latter will fullfil all obligations as a member country. However, UK will be required to give up its voting rights. If it's true, more time will be allowed for business and citizens of both UK and EU to adjust to the changes.

Meanwhile, BBC reported that a draft paper was submitted to the 27 EU states by European Council President Donald Tusk. The paper indicates that free trade talks could start as soon as December. It's near impossible that EU officials will give a "go" signal for trade discussion at the October 19/20 summit due to lack of "sufficient progress" in the negotiations. But opening up the case for start trade agreements in December could give UK the "carrots" for being more decisive on closing issues like the divorce bill.

ECB to cut monthly asset purchase size by half

It's reported the ECB policy makers are considering to cut the monthly asset purchase target by at least half starting next year. That is, the current EUR 60b per month pace could be lowered to EUR 30b per month. Some officials see that as a feasible option. But there are differences on the duration of the extension of the program. ECB spokesman declined to comment on the report.

ECB President Mario Draghi reiterated that interest rate will remain at the current record low "well past" the end of the asset purchase program. He emphasized that the "'well past' is very, very important in anchoring rate expectations." ECB is widely expected to "recalibrate" its asset purchase program this month on October 26.

Trump have more Fed chair interviews to come

In US, White House Chief of Staff John Kelly said that President Donald Trump will have more interviews with the candidates for the job of Fed chair. Kelly said that "all of the people who've been in to interview have been first-round draft choices". And, "we still have more to come." The current short list include Fed Chair Janet Yellen, former Fed Governor Kevin Warsh, current Fed Governor Jerome Powell, Trump's economic advisor Gary Cohn and Stanford University economist John Taylor. Separately, Treasury Secretary Steven Mnuchin said that Trump has no specific deadline to make the decision but it should happen within the month.

Fed Bullard urged not to lose credibility

St. Louis Fed President James Bullard warned that Fed could lose its credibility if it insists on normalizing interest rate without clear evidence of rising inflation. He noted that "if you are going to have an inflation target you should defend it. If you say you are going to hit the inflation target then you should try to hit it and maintain credibility." He pointed to the sluggishness in this year's inflation and said "we more or less lost all the progress that we made the last two years". And, that can send a signal to markets that the inflation target is not that important."

Fed Governor Jerome Powell said that "Fed policy normalization is occurring not in isolation, but in the context of a solid U.S. economic recovery, which should benefit all economies around the world." And, "the most likely outcome is that the challenges posed to (emerging markets) by the normalization of global financial conditions will be manageable." 

China trade surplus narrowed

Released from China, trade surplus surprisingly narrowed to a 6-month low of US$28.5B in September, from US$42B a month ago. The market had anticipated a milder drop to US$39.5B. Growth in exports improved to 8.1% y/y from 5.5% in August, while growth imports accelerated significantly to +18.7% from July's +13.3%.

Notwithstanding a disappointing headline, the report continued to paint a healthy picture on China's economic outlook. A stronger-than-expected imports growth underpinned domestic economic strength. Exports growth, despite missing consensus, still picked up from the same period last year.

More importantly, a narrowing trade surplus could tame the US' complaint of China's currency manipulation. This should help the government maintain a stable and modestly strong renminbi as CCP's 19th national congress approaches. More in Strong Domestic Demand Despite Weak Surplus Headline.

Elsewhere

New Zealand Business NZ manufacturing index dropped to 57.5 in September. Japan M2 rose 4.1% yoy in September. German CPI was finalized at 0.1% mom, 1.8% yoy in September. US CPI and retail sales will be the main feature later in the day.

EUR/GBP Daily Outlook

Daily Pivots: (S1) 0.8877; (P) 0.8954; (R1) 0.8995; More...

The sharp decline from 0.9032 argues that rebound from 0.8745 could have completed. Intraday bias in EUR/GBP is turned back to the downside for 0.8745. Break there will resuming the whole fall from 0.9305 towards 0.8303/12 key support level. On the upside, above 0.9032 will resume the rebound from 0.8745 through 61.8% retracement of 0.9305 to 0.8745 at 0.9091 for retesting 0.9305.

In the bigger picture, there are various ways to interpret price actions from 0.9304 high. But after all, firm break of 0.9304/5 is needed to confirm up trend resumption. Otherwise, range trading will continue with risk of another fall. And in that case, EUR/GBP could have a retest on 0.9303 low. But we'd expect strong support from 0.8116 cluster support (50% retracement of 0.6935 to 0.9304 at 0.8120) to contain downside.

Economic Indicators Update

It has certainly been another eventful trading week for financial markets, as investors tussled with rocky Brexit negotiations, Catalonian developments and geopolitical tensions across the globe.

Global stocks have displayed resilience againstpolitical and geopolitical risk this week, with Asian shares mostly higher during early trading on Friday - thanks to optimism over the global economy. European equities ended mixed on Thursday, amid ongoing political uncertainty in Catalonia and trading may follow a similar pattern today, if market players remain on the sideline. Wall Street retreated from record highs yesterday, and it will be interesting to see how U.S. stocks react to the pending inflation report from the States.

Bitcoin sprints to all-time high

Bitcoin was the talk of the town across financial markets on Thursday, after the cryptocurrency smashed through the $5000 barrier, hitting an all-time high of $5,386.2. It is remarkable how, despite the slew of negative news fired at Bitcoin, it has remained extremely resilient. With prices already surging over 450% this year to above $5300, further gains could be on the cards,as extremely bullish momentum encourages investors to speculate on even grander gains.

Sterling sensitive to Brexit negotiations

The aggressive price action Sterling displayed on Thursday continues to highlight how increasingly sensitive the currency has become to Brexit negotiations.

Earlier on Thursday, the British Pound was under extreme selling pressure after Michel Barniersaid that talks around Britain’s exit from the European Union, were at a “disturbing deadlock”. Sterling later clawed back earlier losses, after a report in Germany’s Handelsblatt newspaper said that the United Kingdom could be offered a two-year transitional Brexit deal.

This could be a wild final trading quarter for the British Pound, especially when considering how the currency has become increasingly sensitive to both monetary policy speculation and Brexit negotiations. Taking a look at the technical picture, the GBPUSD still remains pressured on the daily charts below 1.3300. A failure for bulls to break above this level, may encourage a decline back towards 1.3150. In an alternative scenario, a classic breakout above 1.3300 should trigger a further incline towards 1.3380.

Dollar lower ahead of CPI

The Dollar edged lower against a basket of major currencies during early trading on Friday, as investors awaited U.S. inflation data, which could mould expectations on when the Fed plans to raise rates again this year.

This has been a painful trading week for the Dollar, as fading hopes on Trump’s tax plan and mixed Federal Reserve meeting minutes, weighed heavily on the currency. While September’s meeting minutes revealed that a December interest rate hike was on the table, policymakers remained divided over the inflation outlook in the U.S.. Although expectations remain elevated over the Federal Reserve raising U.S. interest rates in December- with markets pricing in an 88% probability, the outlook for rate hikes in 2018 is open to debate.

Investors should also pay close attention to Trump’s choice of Fed chair. If Trump selects a dovish Chair to replace Janet Yellen, this could weigh on the prospects of higher U.S. interest rates in 2018, consequently pressuring the dollar.

From a technical standpoint, the Dollar Index is under pressure on the daily charts. Sustained weakness below 93.00 may open a path towards 92.50.

Currency spotlight – EURUSD

The Euro enjoyed a relief rally this week, as tensions eased in Spain after Catalonia suspended its declaration of independence.

While the EURUSD could edge higher in the short term amid the optimism, gains are likely to be limited if investor jitters make a comeback. With Spanish Prime Minister Mariano Rajoy giving Catalonia five days to declare independence - or back down, the clock is ticking. If Carles Puigdemont declares independence, then Madrid may try to seize control of Catalonia by invoking Article 155 of the Spanish Constitution. The uncertainty created by such developments is likely to punish the Euro and heighten concerns over political instability in Europe.

Focusing on the technical outlook, EURUSD has found itself in a wide range on the weekly timeframe, with support at 1.1680 and resistance found at 1.2000. Technical traders will be closely observing how prices react to the 1.1850 level - a pivotal point on the daily timeframe. A breakout above this level may open a path towards1.1920. In an alternative scenario, sustained weakness below 1.1850 could encourage a decline towards 1.1730.

In early Friday trading, the markets are relatively static as they wait, in anticipation, for today's US inflation data that will potentially give confirmation that the FOMC will hike interest rates in December. According to the latest CME Fed Watch tool, there is an 88% probability of a rate hike in December. Thursday's release of US PPI for September showed producers experiencing a 0.4% increase, in line with expectations, after a 0.2% increase in August. With producers experiencing inflation, the markets will now be looking at today's CPI to see if such inflationary pressures are reaching consumers. It is, however, important to note that these particular data releases are likely to be 'skewed', as the US economy is still being impacted by Hurricanes Harvey and Irma.

The US Labour market is showing more resilience as Thursday's Initial Jobless Claims from the US Labour Department showed a better than expected decline of 15,000 to 243,000 for the week ended October 7th – better than many had forecast. With fewer Americans seeking unemployment benefits (i.e. more in full-time employment), many expect this fact to also put more inflationary pressure on the US economy and provide more confirmation to the Fed that they can raise rates.

EURUSD is holding steady in early trading, currently at 1.1850.

USDJPY is 0.2% lower overnight, currently trading around 112.05.

GBPUSD is little changed overnight. Currently, GBPUSD is trading around 1.3275.

Gold is trading 0.25% higher, currently trading at $1,296.

WTI benefitted from the recent EIA data gaining 0.25% overnight. Currently, WTI is trading around $51.20.

Major data releases for today:

At 15:30 BST, the US Census Bureau will release Retail Sales (MoM) for September. Consensus is calling for a strong release of 1.7% compared to the previous release of -0.2%. If the release is >1.7% the markets will expect to see USD buying, as it will add to confirmation for a rate hike by the Fed before Year End as consumers are spending more and therefore adding to upward inflationary pressure.

At 15:30 BST, the US Bureau of Labor Statistics will release Consumer Price Index (YoY) and (MoM) for September, along with CPI ex Food & Energy, Core and n.s.a. Annualized CPI is expected to come in at 2.3%, a healthy improvement from the previous release of 1.9%. Month-on-Month CPI is also expected to come in higher at 0.6% from the previous release of 0.4%. As an inflationary indicator, releases above the expected will see USD appreciate

EUR/USD

Current level - 1.1845

The support at 1.1830 is intact and the overall outlook remains bullish, for a rise towards 1.1940 zone. An eventual slide below 1.1830 will challenge 1.1790 support, which should provide a reliable base for the expected upswing.

USD/JPY

Current level - 112.10

The bias is bearish, for a slide towards 111.50. Crucial on the upside is 112.80.

GBP/USD

Current level - 1.3274

The violation of 1.3220 resistance signals a further appreciation towards 1.3340 area. Crucial on the downside is 1.3170.

Currency pair GBP/USD

The GBP/USD broke the support trend line (dotted blue) but failed to break below the previous bottom and is now challenging again the resistance zone (red) and Fibonacci levels of wave 4 (orange). A bullish break would change the wave patterns and could indicate a bullish 123 (brown) or larger ABC. The strong up and down could have been caused by the Brexit news which first

The GBP/USD bounced strongly at the 61.8% Fibonacci support level creating a "V valley" reversal after strong bearish momentum occurred with a 150 pip decline. The extended bullish correction could be a WXY (brown) within wave 4 (orange). A bullish break would make a wave 4 pattern less likely.

Currency pair EUR/USD

The EUR/USD is challenging a resistance trend line (orange). A bullish breakout could see price challenge the larger resistance (red) but it remains unclear whether price is in a wave 5 or in an expanded wave 4 at the moment.

The EUR/USD has retraced back to the 38.2% Fibonacci level of wave 4 (pink). Price could be ready for a bullish continuation as long as price stays above the 61.8% Fibonacci level.

Currency pair USD/JPY

The USD/JPY could be building a larger WXY (pink) correction within wave 2 or B (purple).

The USD/JPY could be completing a potential ABC (purple) correction within wave Y (pink).