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During Tuesday morning hours, the rate was trading at the upper boundary of the medium descending pattern line at the 108.91 mark. Besides, the USD/JPY was supported by the 55-hour and the 100-hour simple moving averages.

Most likely, the currency exchange pair will get retraced by the medium pattern line to push the rate to trade at the previously drawn pattern near the 38.20% Fibonacci retracement level at the 108.43 mark.

On the other hand, the rate could break the medium pattern line at the 108.91 mark to trade towards the 50.00 Fibonacci retracement level at the 109.60 mark.

During Tuesday morning hours, the yellow metal slumped by 1263 pips or 0.98% to trade at the 1,282.00 level. Note, the 200-hour simple moving average supported the gold from the fall at the 1281.89 mark.

In regards to the near-term future, most likely, the 200-hour simple moving average will continue to support the yellow metal to push the gold to trade up towards the 23.60 % Fibonacci retracement level at the 1,291.57 mark.

Brexit uncertainty continues to be the key determinant of sterling’s movement in the coming quarters. Market consensus signals that GBPUSD would rally as much as 4% in 6 months and about 6% in 2019. The forecasts are based on the assumption of a smooth Brexit. We are, however, skeptical over such optimism. We expect that the UK Parliament would eventually ratify the Withdrawal Agreement, avoiding a no-deal Brexit. Yet, this is just the beginning of the Brexit process. As the UK officially leaves EU on the deadline of March 29 and enters the 21-month transition period, negotiations of future trade relations with the EU would be again create uncertainty in the well being of UK’s economy and BOE monetary policy. Volatility in GBP should persist in 2019.

Brexit Uncertainty Remains after March 29

The UK Parliament is expected to vote on the Withdrawal Agreement on January 15, after PM Theresa May called off a vote last month amidst doomed defeat. While refusing a second referendum and extending the Brexit process, May vowed that she would seek further “assurances” from the EU on issues such “measures specific to Northern Ireland” and “a greater role for parliament as we take these negotiations forward into the next stage for our future relationship”. We expect some tactical changes in the agreement might lead to eventual approval by the MPs. Despite the threats from hardliner Brexiteers, they are probably unwilling to bear the sin of contributing to no-deal Brexit.

Yet, approval of the Withdrawal Agreement does not mean the dust is settled. Indeed, this marks the beginning of a more critical stage. As UK enters the 21-month transition period, negotiations on future trade relations with the EU starts. The negotiations involve discussion on UK-EU trade relations from 2021 onwards. For the UK, tt is a matter of trade-off between sovereignty and free- trade privileges. Although PM May had attempted to entangle trade issues with the divorce bills and Irish border, the EU stood firm and insisted on separating trade issues from the withdrawal deal. We expect EU would remain assertive in trade negotiations. This would not bode well for the UK. After all, leaving the single market, which has taken up 40% of UK exports and contributed about 45% of UK’s imports, is prone to have tremendous impacts on UK’s economy.

Economic Outlook

The latest Markit report shows that the country’s manufacturing PMI rose to a 6-month high of 54.2 in December. Note, however, that the strong reading was driven by rises in new business and stocks of purchases. Rather than showing confidence in the Brexit outlook, these signaled producers and customers, both at home and overseas, are preparing for the hard time in case of Brexit disruption. Services PMI climbed +0.8 point higher to 51.2 in December. This was compared with a 28-month low made a month ago. indeed, the final two months of 2018 saw the weakest back-to-back expansions of business activity since late-2012. As noted in the accompanying statement, the companies surveyed indicated their anxiety over Brexit and need for “clarity on Brexit” so as to “prevent the economy sliding into contraction”.

UK’s economy has been struggling over the past year. Although growth has been picked up from the exceptionally weak first quarter, the recovery is mild. Monthly data suggest that has been flat in August and September, before showing a +0.1% expansion in October. From 3-month basis, GDP grew +0.4% in the three months to October, easing from +0.6% in the three months to September. According to the government, "GDP growth slowed going into the autumn after a strong summer, with a softening in services sector growth mainly due to a fall in car sales”. "This was offset by a strong showing from IT and accountancy”. For the first 10 months of the year, GDP has gained +1% from the end of the prior year.

Inflation has remained above BOE’s +2% target. However, it has been falling from the +3.1% peak in November 2017. The central bank should feel less urgent to raise interest rate to curb inflation.

BOE Monetary Policy

The central bank’s monetary policy is also highlt dependent on Brexit. As such, forecast BOE's rate hikes is as challenging as forecasting the outlook of sterling. Prolonged Brexit uncertainty might delay rate hike. BOE increased the policy rate twice (November 2017 and August 2018) after the 2007/08 global financial crisis. Both hikes were triggered by soaring inflation and adopted reluctantly by the central bank. If inflation steadies or continues its downtrend this year, BOE would prefer to take a wait-and- see mode, trying to leaving the policy rate as low levels so that it would not interrupt the economic recovery. The consensus (Reuters poll) forecasts that there would one rate hike by BOE this year, taking the bank rate from the current 0.75% to 1%.

The USD weakened against a number of its counterparts yesterday as Fed officials expressed their concern for the Fed’s rate hike path. Specifically Atlanta Fed President Raphael Bostic, added to the Fed’s dovish tone as he stated that the Fed may have to hike rates only once this year. According to some analysts, part of the market expects there to be no rate hikes at all this year, while some analysts seem to prepare for a possible rate cut. Analysts also point out that the Fed seems to be listening to the market and that inflation figures may provide room for a pause in its rate hike cycle. On other news, US Commerce Secretary Wilbur Ross stated that the US and China could reach a trade deal that “we could live with”, boosting optimism for a possible trade deal in the near future. We see the case for volatility to be maintained for the USD over the short term. EUR/USD rose yesterday breaking the 1.1465 (R1) resistance line, however corrected lower during today’s Asian session. Should the bearish sentiment for the USD continue to wander over the markets, we could see the pair rising even further. Should the pair find new buying orders along its path, we could see the pair rising, breaking the 1.1465 (R1) resistance line and aim for the 1.1500 (R2) resistance level. Should on the other hand, the pair come under the selling interest of the market, we could see it breaking the 1.1425 (S1) support line and aim for the 1.1385 (S2) support level.

GBP rises before Brexit debate

The sterling rose against the USD yesterday reaching a one week high, as the market prepares for the Brexit debate in the UK parliament. Analysts expect there to be increased volatility over GBP pairs for the next two weeks. The debate is to start tomorrow and the parliament’s vote is expected to be held on Tuesday the 15th of January. Theresa May is currently expected to lose the vote as members of the Conservative party along with the DUP seem determined to vote against Theresa May’s Brexit plan. Analysts point out that the parliament vote is expected to be carried out this time, however also stress the possibility of the Brexit date to be delayed. We see the case for the increased political uncertainty to keep the pound on a general downtrend over the next days. GBP/USD posted some gains yesterday, however corrected a bit lower during the Asian session and stayed below the 1.2795 (R1) resistance line during the whole session yesterday. We could see the pair rising once again today, however cable could prove sensitive to any Brexit headlines. Should the bulls dictate the pair’s direction, we could see the pair breaking the 1.2795 (R1) resistance line and aim for the 1.2880 (R2) resistance hurdle. If the bears take over, we could see the pair breaking the 1.2700 (S1) support line and aim for lower grounds.

In today’s other economic highlights:

In today’s European session, we get Germany’s industrial output growth rate for November, UK’s Halifax Housing prices growth rate and Eurozone’s final consumer sentiment reading for December. In the American session, we get the US trade balance figure for November, Canada’s trade balance figure for November and the API weekly crude oil inventories figure.

EUR/USD H4

Support: 1.1425 (S1), 1.1325 (S2), 1.1345 (S3)
Resistance: 1.1465 (R1), 1.1500 (R2), 1.1550 (R3)

GBP/USD H4

Support: 1.2700 (S1), 1.2630 (S2), 1.2555 (S3)
Resistance: 1.2795 (R1), 1.2880 (R2), 1.2960 (R3)

UK Brexit Minister Stephen Barclay denied the Daily Telegraph report that they're discussing the possibility f withdrawal request with EU. He told BBC radio that "I've had no discussions with the European Union in terms of extension."

When he's explicitly asked if he could deny the report, Barclay said "Yes, because I can be very clear that the government's policy is to leave on March 29, the prime minister has made that clear on numerous occasions to parliament."

Separately, Irish Prime Minister Leo Varadkar pledged to try to give UK the reassurances needed for getting the Brexit agreement through the parliament. Varadkar said "We don't want to trap the UK into anything – we want to get on to the talks about the future relationship right away," And, "I think it's those kind of assurances we are happy to give."

XAUUSD (1282.57): Gold prices attempted to rally off the 1280 support only to form a lower high. Following this, price action pushes lower. A retest of the 1280 handle is quite likely. As long as the support holds, we can expect gold prices to maintain the gains with a possible retest back to the highs. Alternately, failure to hold the support at 1280 could trigger a potential decline to the 1250 handle where support is pending retest.

AUDUSD (0.7128): The AUDUSD currency pair maintained the gains, but price action turned flat around the 0.71300 level. This could potentially signal correction to the short-term rally. The previously breached resistance/support level at 0.7022 remains a key level of interest to the downside. As long as this support holds, we can expect the AUDUSD to form a bottom with the bias turning to the upside. The resistance level at 0.7191 remains the next main resistance level targeted in the short term.

EURUSD (1.1441): The EURUSD currency pair was seen posting gains on Monday. Although the overall trend remains flat, price action rallied back to the resistance area of 1.1461, retesting the level for the fifth time. As long as the resistance level is not breached, the Euro is expected to remain range bound. On the daily chart, there are signs that price action is maintaining the ascending triangle pattern which indicates a potential upside breakout in prices. The next main target above 1.1461 resistance is 1.1575.

The U.S. Dollar traded weaker on Monday amid a host of mixed data. From the Eurozone, the Sentix investor confidence report showed a decline in the index for the fifth consecutive month. The index fell to -1.5 in January while the current situation index declined to 18 marking a one year low.

Germany's factory orders report showed a decline in activity for the first time in four months in November. Factory orders went down 1.0% on a seasonally adjusted basis and were more than the median estimates.

Data from the United States showed that the ISM's non-manufacturing PMI declined to 57.6 in December after rising to 60.7 in November. All significant sub-components of the services sector also showed a decline.

The economic data today will see the release of the German industrial production figures. Economists forecast industrial production to rise 0.3% following a decline of 0.5% previously.

From Canada, the trade balance figures will be public, and economists forecast trade balance to rise by 1.9 billion. Trade balance figures from the United States will be coming out later and is expected to show an increase to 54 billion.

Short term Elliott Wave view in SPX suggests that the decline to 2346.58 ended wave (3). The Index is currently correcting in wave (4) as a double three Elliott Wave structure. Up from 2346.58, wave W ended at 2520.27, wave X ended at 2443.96, and wave Y remains in progress towards 2619.58 – 2727.95 area before Index resumes lower or pullback in 3 waves at least.

A double three Elliott Wave structure is a complex correction in which we have two Elliott Wave corrective structures together. In this case, wave W subdivides as a zigzag Elliott Wave structure where wave ((a)) ended at 2467.76, wave ((b)) ended at 2397.94, and wave ((c)) of W ended at 2520.27. Wave X subdivides as a double three of lesser degree where wave ((w)) ended at 2467.47, wave ((x)) ended at 2519.49, and wave ((y)) ended at 2443.96.

Wave Y is proposed to be unfolding as a zigzag where wave ((a)) ended at 2538.07, wave ((b)) ended at 2522.13, and wave ((c)) of Y is in progress towards 2619.58 – 2727.95 before ending the entire wave (4) correction. Expect sellers to appear once wave (4) correction is over at the blue box area for a 3 waves pullback at least.

SPX 1 Hour Asia Elliott Wave Chart