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Global core bonds lost ground today as investor sentiment remained constructive. Yesterday’s UK Brexit vote was already discounted. In the meantime, China repeated its pledge to support he Chinese economy and ECB chairman Draghi said even though the momentum is slowing, he doesn’t expect the euro zone economy to fall into a recession. With no important eco data on the calendar today, risk sentiment stayed positive with EU equities cautiously edging higher. German Bunds couldn’t maintain the upward momentum of late and declined. A somewhat soft 30-y auction initially supported the move, but some of the losses were paired after lunch. The German yield curve is edging higher with changes in the range of +1.6 bps (2-yr) to +2.1 bps (30-yr). The US eco calendar was also empty due to the ongoing US government shutdown. Only the NAHB Housing Index is something to watch, as a disappointing result could strengthen worries about a slowdown in the US housing market. The US yield curve moves higher with changes varying between +2.0 bps (2-yr) to +2.7 bps (10-yr). Italian BTP’s rallied in the wake of yesterday’s successful bond syndication, pushing Italian 10-yr yield 9.3 bps lower. The spread over the German 10-yr yield tightened 11 bps.

The dollar remained well bid today, extending gains against the euro and the yen. Markets apparently see the US economy as more resilient to multiple global headwinds compared to EMU despite uncertainty on the impact of the US government shutdown. This is visible in US equity outperformance, a gradual re-widening of the US/German (EMU) interest rate differentials and USD outperformance this week. EUR/USD slipped back south below the 1.14 handle. USD/JPY rebounded to the high 108 area. Today’s price pattern was mainly a continuation of yesterday’s moves as there were few eco data to guide trading. EUR/USD 1.1309 (2019 low) is first intermediate support as the pair returned in the previous 1.12/1.15 consolidation range.

Sterling trading developed in a remarkably calm way ‘the day after’ the historic defeat of PM May’s Brexit deal. Not that much has changed with respect to reaching a solution for the brexit impasse. A muddling-through scenario might continue for quite some time. Yesterday evening, sterling rallied. Investors concluded that chances on a no-deal Brexit declined and that a delay of the March 29 exit is ever more likely. BoE governor Carney joined this interpretation as he testified before the Parliament’s Treasury Committee. UK December inflation data (headline 2.1%) were largely as expected. Inflation returns to the BoE target due to recent decline in oil prices. The BoE stays in wait-and-see modus. The bank is putting measures in place that can be used in case of financial turbulence due to Brexit. This evening, the spotlights will be on the no-confidence vote against UK government. PM May is expected to survive this vote. If so, it won’t change the course of the brexit process. Political visibility remains as low as to was before this week’s ‘key vote’. EUR/GBP hovers in the mid  0.88 area.

News Headlines

In an attempt to minimize the impact of the partial government shutdown, the Trump administration ordered thousands of furloughed employees back to work. They have been summoned to, a.o., inspect planes and issue tax refunds, but will receive no pay for doing so. A move that critics say is flirting with the illegal.

Sweden’s Left Party said it would abstain in a vote on Friday for Stefan Löfven as PM of a government in which it takes no part in. That would give Löfven the numbers needed to be elected and for the political stalemate to be unlocked, four months after the elections.

The Turkish central bank kept interest rates stable at 24% as inflation (20% in December) is still way above the bank’s 5%-target. The move was widely anticipated though some feared recent inflation easing amidst growth fears and looming local elections (end of March) would have prompted the politically pressured bank to lower rates.

Daily Pivots: (S1) 1.1366; (P) 1.1428; (R1) 1.1475; More.....

Intraday bias in EUR/USD remains mildly on the downside for 1.1307 support. Current development argues that corrective rise from 1.1215 has completed earlier than expected. Break of 1.1307 will likely resume larger down trend from 1.2555 through 1.1215 low. On the upside, above 1.1489 minor resistance will turn bias back to the upside for 1.1569 instead.

In the bigger picture, as long as 1.1814 resistance holds, down trend down trend from 1.2555 medium term top is still in progress and should target 61.8% retracement of 1.0339 (2017 low) to 1.2555 at 1.1186 next. Sustained break there will pave the way to retest 1.0339. However, break of 1.1814 will confirm completion of such down trend and turn medium term outlook bullish.

Daily Pivots: (S1) 1.2714; (P) 1.2816; (R1) 1.2961; More....

Intraday bias in GBP/USD remains neutral at this point. Further rise remains mildly in favor. On the upside, break of 1.2930 will extend the corrective rebound from 1.2391 to 1.3174 resistance, which is close to 38.2% retracement of 1.4376 to 1.2391 at 1.3149. We'd expect strong resistance from there to limit upside, at least on first attempt. On the downside, break of 1.2668 should now confirm completion of the rebound. In this case, intraday bias will be turned back to the downside for retesting 1.2391 low.

In the bigger picture, whole medium term rebound from 1.1946 (2016 low) should have completed at 1.4376 already, after rejection from 55 month EMA. The structure and momentum of the fall from 1.4376 argues that it's resuming long term down trend from 2.1161 (2007 high). And this will now remain the preferred case as long as 1.3174 structural resistance holds. GBP/USD should target a test on 1.1946 first. Decisive break there will confirm our bearish view. However, sustained break of 1.3174 will invalidate this case and turn outlook bullish.

Daily Pivots: (S1) 108.28; (P) 108.53; (R1) 108.94; More..

Intraday bias in USD/JPY remains neutral as consolidation continues below 109.08. In case of another rise, we'd expect upside to be limited by 109.46 resistance to complete the rebound from 104.69 short term bottom. On the downside, below 107.77 will turn bias to the downside for retesting 104.69 low. However, sustained break of 109.46 will dampen our view and bring stronger rebound instead.

In the bigger picture, price actions from 125.85 (2015 high) are seen as a long term corrective pattern, no change in this view. Apparently, such corrective pattern is not completed yet. Fall from 114.54 is seen as part of the falling leg from 118.65 (2016 high). Break of 104.62 will target 100% projection of 118.65 to 104.62 from 114.54 at 100.51, which is close to 100 psychological level. But in that case, we'd expect strong support from 98.97 to contain downside to bring reversal. Also, this bearish case will remain the preferred one as long as 114.54 resistance holds.

GBPAUD is advancing above the 20-simple moving average (SMA) today in the daily timeframe, approaching the 23.6% Fibonacci retracement level of the upleg from 1.5725 to 1.8730, around 1.8015. The technical structure is not looking very positive at the moment with the MACD trying to post a bullish cross with its trigger line, while the RSI is rising higher above the threshold of 50.

If the price manages to edge higher and rise above the 23.6% Fibonacci mark of 1.8015, this could send the price until the 1.8150 resistance, taken from the highs on November 6. An upside penetration of this barrier could drive the market towards the 1.8540 resistance, registered on January 3.

However, in case of a downward movement the market could find support near the 40-SMA of 1.7710. Moving lower, the next supports are coming from 1.7610 and the 38.2% Fibonacci of 1.7575. A successful penetration of this level could increase downside pressures towards the 50.0% Fibonacci region of 1.7220.

Overall, the pair has been trading within an upside rally since October 2016, creating higher highs and higher lows during this period.

The Canadian dollar continues to have an uneventful week. In Wednesday’s North American session, the pair is trading at 1.3263, down 0.03% on the day. On the release front, there no Canadian events. With no major indicators in the U.S., traders can expect USD/CAD to continue to have a quiet day. On Thursday, Canada releases ADP nonfarm payrolls, while the U.S. posts unemployment claims and the Philly Fed Manufacturing Index.

It’s been a stellar January for the Canadian dollar, which has jumped 2.8%, erasing the losses from a dismal December. Will the rally continue? Last week, the Bank of Canada lowered its growth forecast for 2019 to 1.7%, down from 2.1%. The bank also noted concerns over lower oil prices and the global trade war, both of which have hurt the economy. Still, the BoC expects economic activity to strengthen in the second half of the year, so it appears unlikely that the BoC will raise rates in the first quarter.

The Federal Reserve has made a U-turn on monetary policy, but by how much? There is a large discrepancy between Fed forecasts and market expectations, which could result in volatility in the currency markets, as traders try to figure out what the Fed will do in 2019. The most recent projections from individual policymakers in the Federal Open Market Committee (FOMC) stands at two rate hikes this year, but the markets are expecting the Fed to hold pat and not raise rates in 2019. Moreover, the markets have priced in a rate cut before the end of the year at 28 percent. On Monday, former Fed Chair Janet Yellen said that she expected the Fed to take a breather, saying that it’s ‘very possible’ that the Fed has made its last hike of this cycle.

Daily Pivots: (S1) 0.9820; (P) 0.9857; (R1) 0.9914; More....

USD/CHF rebounds to as high as 0.9903 so far today. Breach of the ner term falling channel resistance argues that correction from 1.0128 might have completed earlier than expected at 0.9716. Intraday bias is now cautiously on the upside for 0.9963 resistance first. Decisive break there would add more credence to this bullish case and target retest of 1.0128. However, break of 0.9800 minor support will turn bias back to the downside. Corrective fall from 1.0128 would extend through 0.9716 to 0.9541 cluster support (61.8% retracement of 0.9186 to 1.0128 at 0.9546) instead.

In the bigger picture, current development suggests that rise from 0.9186 has possibly completed with three waves up to 1.0128 already. Decline from 1.0128 could either be correcting this move, or reversing the trend. As long as 0.9541 support holds, we'd slightly favor the former scenario, and expect another rise through 1.0128 at a later stage. However, sustained break of 0.9541 will confirm trend reversal and bring deeper fall back to 0.9186 low.

The forex markets are rather quiet today. Sterling, US Dollar and Canadian Dollar are the stronger ones The Pound is supported by increasing chance of a delay in Brexit, or no Brexit at all. Canadian Dollar is lifted as WTI crude oil rebound and is back at 51.8. Meanwhile, the greenback follows long treasury yields higher, ignoring the record government shut down. Euro is staying soft on slowdown worries. But Australian and New Zealand Dollar are even weaker.

Technically, we'd maintain that EUR/USD's corrective rise from 1.1215 is possibly completed earlier than expected at 1.1569. Further decline is mildly in favor for 1.1307 next. USD/CHF's breach of near term channel resistance is also a bullish development. Focus will now be on 0.9965 resistance. Yen crosses are bounded in tight range for now, awaiting breakout. While Sterling is firm, there is no committed buying yet.

In other markets, FTSE is currently down -0.48%, DAX is up 0.08%, CAC is up 0.15%. German 10-year yield is up 0.015 at 0.224. Earlier today, Nikkei dropped -0.55%. Hong Kong HSI rose 0.27%. China Shanghai SSE ended flat. Singapore Strait Times rose 0.52%. Japan 10-year JGB yield dropped -0.0078 to 0.007.

UK PM May maintains her pledge to deliver Brexit ahead of no-confidence vote

In the UK, eyes are now first on no-confidence vote on Prime Minister Theresa May at 1900GMT. After yesterday's humiliating 432 to 202 defeat of her Brexit deal, May told the parliament today that "What the government wants to do is first of all to ensure that we deliver on the result of the referendum".

She added that "We want to do it in a way that ensures we respect the votes of those who voted to leave in that referendum. That means ending free movement, it means getting a fairer deal for farmers and fishermen, it means opening up new opportunities to trade with the rest of the world."

Opposition Labour leader Jeremy Corbyn urged a new election. He said "if a government cannot get its legislation through parliament, it must got to the country for a new mandate". And, "there can be no doubt that this is indeed a zombie government."

Conservative backbencher Dominic Grieve, proposed two new bills that would enable preparations for a second referendum. He expected the government to disregard it as it controls the time and schedule for debates. But he added "if Parliament seizes control, then I imagine time will be found for it," and "it's a marker, so once it's down it can be used."

German news paper Handelsblatt reported that Germany, the Netherlands and some other EU countries are trying to explore some concessions regarding the issue of Irish border backstop. But we'll tend not to pay too much attention to rumors, until they're confirmed.

BoE Carney talks markets' initial take on May's Brexit defeat

BoE Governor Mark Carney told the parliament that after yesterday's vote in the Commons, the risk of a no-deal Brexit has diminished, or the process would be extended. But Carney emphasized that "I'm not giving my view, I'm giving the markets' initial take". Also he added "I wouldn't put much weight on these very short term-moves. The market is waiting."

UK CPI slowed to 2.1%, core CPI up to 1.9%

UK CPI slowed more than expected to 2.1% yoy in December, down from 2.3% yoy, missed consensus of 2.2% yoy. Core CPI, however, accelerated to 1.9% yoy, up from 1.8% yoy and beat expectation of 1.8% yoy. Also from UK, RPI slowed to 2.7% yoy, down from 3.2% yoy and missed expectation of 2.8% yoy. PPI input dropped to 3.7% yoy, down from 5.6% yoy, below expectation of 4.6% yoy. PPI output dropped to 2.5% yoy, down from 3.1% yoy, missed expectation of 2.9% yoy. PPI output core rose to 2.5% yoy, up from 2.4% yoy and beat expectation of 2.4% yoy. House price index rose to accelerated to 2.8% yoy in November, below expectation of 3.0% yoy.

ECB Nowotny: Brexit uncertainty is a psychological problem for banks, not technical

ECB Governing Council member Ewald Nowotny warned that "nothing is as damaging as this long, prolonged uncertainty," regarding Brexit. However, he added that "from the point of view of the banking side perhaps it's not so much a technical problem because I think here we are pretty well prepared for whatever outcome there might be".

Nowotny said "it could be a psychological problem ... So if that is something that could create some kind of self-fulfilling negative perspectives, that is something that might be really dangerous."

BoJ might cut inflation forecasts next week

Reuters reported, quoting unnamed source that BoJ will likely lower inflation forecasts at next week's meeting. It's noted that oil prices have fallen significantly since the last economic projections back October. And that would have a negative impact on the upcoming projections to be published along with the meeting last week. Though, on growth, BoJ will likely maintain its upbeat assessment.

Back in October, BoJ projects core CPI to hit 1.4% in fiscal 2019 and then 1.5% in fiscal 2020. Such projections would be trimmed to reflect the decline in oil as well as global slowdown.

PBoC injects record cash as liquidity is falling rapidly

The People's Bank of China injected record amount of cash into the market to "maintain "reasonably ample" liquidity in the banking system. The central bank said the act was to provide support for the current peak period for tax payments. And it came at a time when "the banking system's overall liquidity is falling rapidly".

PBoC injected CNY 350B through 7-day reverse bond repurchases and CNY 220B through 28-day reverse bond repurchases. At the same time, CNY 10B reverse repose are set to mature today. The net CNY 560B, or USD 83B, is the largest daily injection on record.

The act is seen as a sign of consensus in the Chinese government for decisive stimulus to the economy, in light of the ugly trade data as released earlier this week.

USD/CHF Mid-Day Outlook

Daily Pivots: (S1) 0.9820; (P) 0.9857; (R1) 0.9914; More....

USD/CHF rebounds to as high as 0.9903 so far today. Breach of the ner term falling channel resistance argues that correction from 1.0128 might have completed earlier than expected at 0.9716. Intraday bias is now cautiously on the upside for 0.9963 resistance first. Decisive break there would add more credence to this bullish case and target retest of 1.0128. However, break of 0.9800 minor support will turn bias back to the downside. Corrective fall from 1.0128 would extend through 0.9716 to 0.9541 cluster support (61.8% retracement of 0.9186 to 1.0128 at 0.9546) instead.

In the bigger picture, current development suggests that rise from 0.9186 has possibly completed with three waves up to 1.0128 already. Decline from 1.0128 could either be correcting this move, or reversing the trend. As long as 0.9541 support holds, we'd slightly favor the former scenario, and expect another rise through 1.0128 at a later stage. However, sustained break of 0.9541 will confirm trend reversal and bring deeper fall back to 0.9186 low.

Economic Indicators Update

In the UK, eyes are now first on no-confidence vote on Prime Minister Theresa May at 1900GMT. After yesterday's humiliating 432 to 202 defeat of her Brexit deal, May told the parliament today that "What the government wants to do is first of all to ensure that we deliver on the result of the referendum".

She added that "We want to do it in a way that ensures we respect the votes of those who voted to leave in that referendum. That means ending free movement, it means getting a fairer deal for farmers and fishermen, it means opening up new opportunities to trade with the rest of the world."

Opposition Labour leader Jeremy Corbyn urged a new election. He said "if a government cannot get its legislation through parliament, it must got to the country for a new mandate". And, "there can be no doubt that this is indeed a zombie government."

Conservative backbencher Dominic Grieve, proposed two new bills that would enable preparations for a second referendum. He expected the government to disregard it as it controls the time and schedule for debates. But he added "if Parliament seizes control, then I imagine time will be found for it," and "it's a marker, so once it's down it can be used."

German news paper Handelsblatt reported that Germany, the Netherlands and some other EU countries are trying to explore some concessions regarding the issue of Irish border backstop. But we'll tend not to pay too much attention to rumors, until they're confirmed.

EURJPY has been moving within a sideways channel over the last couple of weeks with upper boundary the 125.05 resistance and lower boundary the 123.40 support. Currently, the price is consolidating below the simple moving averages as well as below the 38.2% Fibonacci retracement level of the downward movement from 133.10 to 118.57.

According to the technical indicators, in the 4-hour chart, the RSI is pointing slightly up below the 50 level, while the stochastic oscillator is strengthening its momentum higher above the oversold zone.

If the market pushes the pair higher above the upper boundary, prices could challenge the 125.55 resistance level, taken from the low on August 17. More advances would likely open the way for the immediate resistance of the 50.0% Fibonacci of 125.85, while traders’ attention could turn on the 127.10 hurdle, identified by the peak on December 27.

On the flipside, if the market manages to turn to the downside again and slips back below the 123.40 support, this could send prices until the 122.80 support level before touching the 23.6% Fibonacci of 122.00.

To sum up, EURJPY has been trading in a narrow range in the short term, however, in the longer timeframe the price remains in a strong bearish structure following the pullback on 133.10.