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UK retail sales came in stronger than expected in November. But the pound paid little attention to the data, as BoE rate decision looms. Also, Sterling is overwhelmed by strength of Euro and Swiss Franc, and selloff in Dollar.

• Retail sales including auto and fuel rose 1.4% mom, 3.6% yoy versus expectation of 0.3% mom, 1.9% yoy.
• Retail sales excluding auto and fuel rose 1.2% mom, 3.8% yoy versus expectation of 0.2% mom, 2.3% yoy.

ONS noted that
"retailers reported strong growth on the month due to Black Friday promotions in November, which continues the shifting pattern in consumer spending to sales occurring earlier in the year".

Full release here.

Suggested readings on BoE:

• BOE Probably Turns More Cautious amid Brexit Uncertainty
• Brexit Strain to Take Shine off UK CPI and Retail Sales Data, as Well as BoE Meeting

Commerce Ministry spokesman Gao Feng confirmed in a regular press briefing there were talks between China and US on trade yesterday. Both sides exchanged opinions on topics including balancing trade and intellectual property protection. Further than that, there are plans for more US-China trade talks in January. He said that both sides had maintained very close communications after Xi-Trump meeting earlier this month.

Also Gao hails that both sides took "proactive" measures on resolving trade conflicts and released "positive signals". And he emphasized this is " an important condition for the smooth progress of the consultations" on trade and economic frictions. Gao pointed to US formally suspended additional tariffs on Chinese imports till March 2. Also, China suspended additional tariffs on US autos still March 31.

Full Q&A in simplified Chinese.

The Euro regained traction and moved higher in early European trading on Thursday, following quick pullback from session high on Wednesday after Fed policy announcement.

The US central bank raised interest rates by 0.25%, in widely anticipated decision, but surprised markets by more hawkish then expected tone regarding the steps in 2019.

Markets expected the Fed to remain dovish in light of growing concerns about slowdown in global economy, but Fed chief Powell signaled further hikes next year, although in slower pace, with two rate hikes expected in 2019, compared to previous signals about three hikes.

While the Dec hike was already priced in, surprise forecasts initially boosted the greenback, but the action was so far limited.

The Euro recovered quickly from the action that was mainly not expected and broke again into thick daily cloud, offsetting negative signals from strong upside rejections in past two days which left daily candles with long upper shadows.

Strong bullish momentum supports the action which requires eventual close in the daily cloud as initial signal.

Fresh bullish acceleration pressures key barrier at 1.1444 (Fibo 38.2% of 1.1815/1.1215) where rallies were already rejected twice (19 / 10 Dec).

Break and close above 1.1444 pivot would be strong bullish signal for extension of recovery from the double-bottom at 1.1270 zone through recent highs at 1.1472/99, towards next key barrier at 1.1515 (daily cloud top / 50% of 1.1815/1.1215).

Res: 1.1444, 1.1472, 1.1499, 1.1515
Sup: 1.1397, 1.1388, 1.1362, 1.1336

The FOMC hiked rates as was widely expected yesterday, raising interest rates by 25 basis points from 2.25% to 2.50%. Analysts point out that the markets were surprised by the Fed’s commitment to keep the core of its prior rate hike path, despite rising uncertainty. It should be noted that as the markets may have expected a more dovish outcome from the meeting, the bank surprised them as there were only slight changes in the statement along with lower growth and inflation forecasts. Also please note that the bank now sees two more rate hikes in 2019, as per the new dot-plot, instead the previous three, however the market remains skeptical as it seems currently to be pricing-in no to one rate hike in 2019. The strengthening of the USD during the time of the decision may not be as convincing and we would like to allow for some time for the dust to settle down in order to see the full effect of the decision. Despite EUR/USD rising and clearly breaking the 1.1385 (R1) and the 1.1425 (R2) resistance level, the release of the FOMC interest rate decision caused a drop in the pair’s price action surrendering any gains made and stabilising somewhat below the 1.1385 (R1) resistance line during the Asian session. Should the bulls take over once again today we could see it breaking the 1.1385 (R1) resistance line and aim for the 1.1426 (R2) resistance hurdle. Should the bears take over, we could see it dropping even further and breaking the 1.1345 (S1) support line.

BoE Interest rate decision

Bank of England is to announce its own interest rate decision today (12:00, GMT) and is widely expected to remain on hold at +0.75%, with GBP OIS implying a probability of 99.24% for such a scenario. Should the bank remain on hold as expected, we could see the market’s attention turned to the accompanying statement. We see the case for Brexit uncertainty to weigh on the statement, however it should also be noted that yesterday’s deceleration of the inflation rate, as well as weak GDP growth rates could also have a dovish effect on the bank’s decision. On the bright side, the UK economy seems to be enjoying a rather tight labour market, however that might prove insufficient for a more hawkish view by the bank. Should the bank remain on hold and dovish elements prevail in the accompanying statement, we could see the bearish sentiment for the pound increasing. Cable maintained a sideways movement, testing and finally breaking the 1.2630 (R1) support line (now turned to resistance). Should BoE’s interest rate decision enhance the bearish sentiment for the pound, we could see the pair breaking the 1.2555 (S1) support line and aim for lower grounds. Should on the other hand, the market favor the pair’s long positions, we could see it breaking the 1.2630 (R1) resistance line and aim for the 1.2700 (R2) resistance level.

In today’s other economic highlights:

During the European session today, we get from Sweden Riksbank’s interest rate decision which is expected to remain on hold and should the bank sound hawkish, we could see the SEK getting some support. From the UK, we get the retail sales growth rates for November and from the Czech Republic CNB’s interest rate decision, which is also expected to remain on hold after four consecutive rate hikes. In the American session, we get from the US the Philly Fed Manufacturing Index for December and from Canada the wholesale sales growth rate for October. Also please be advised that the volatility surrounding the FOMC’s interest rate decision yesterday, affected gold prices, causing them to drop after the announcement of the decision. Should you be interested on more fundamental news regarding the precious metal, please refer to our Gold Weekly outlook, due out later today.

EUR/USD H4

Support: 1.1345 (S1), 1.1305 (S2), 1.1265 (S3)

Resistance: 1.1385 (R1), 1.1425 (R2), 1.1465 (R3)

GBP/USD H4

Support: 1.2555 (S1), 1.2485 (S2), 1.2415 (S3)

Resistance: 1.2630 (R1), 1.2700 (R2), 1.2795 (R3)

The US dollar fell against a basket of major currencies after the Fed meeting. Yesterday, the regulator raised the interest rate at 25 basis points to 2.50%, as experts expected. However, investors were disappointed by the news that the planned number of rate increases in 2019 was reduced from three to two. Also, Fed Chairman, Jerome Powell, noted that the volatility of the financial market increased, and inflation at the end of the year was more restrained than expected. Therefore, in his opinion, reducing the number of rate increases will support the economy. The dollar index (#DX) closed in the negative zone (-0.11%) yesterday.

Yesterday, economic data from the UK, Canada, the US and New Zealand was also published. Thus, the consumer price index in the UK counted to 2.3% in November, as the experts forecasted. The core consumer price index in Canada fell in November to -0.2%. Existing home sales in the US rose to 5.32M in November and were better than the forecasted 5.20M. New Zealand's GDP counted to 0.3% in the third quarter instead of 0.6%. Today we recommend paying attention to the news feed of the UK and the US.

The "black gold" prices have risen after the publication of the report on crude oil inventories in the United States. At the moment, futures for the WTI crude oil are testing the mark of $47.10 a barrel.

Market Indicators

• Yesterday, aggressive sales were observed in the US stock market: #SPY (-1.50%), #DIA (-1.66%), #QQQ (-2.46%).
• The 10-year US government bonds yield has continued to decline. Currently, the indicator is at the level of 2.75-2.77%.

The news feed on 20.12.2018:

• The volume of retail sales in the UK at 11:30 (GMT+2:00);
• Bank of England interest rate decision at 14:00 (GMT+2:00);
• Philadelphia Fed manufacturing index in the United States at 15:30 (GMT+2:00).

The U.S. Federal Reserve raised interest rates on Wednesday, as expected, but forecast fewer rate hikes next year and signaled its tightening cycle is nearing an end in the face of financial market volatility and slowing global growth

'The central bank said the U.S. economy has been growing at a strong rate and the job market has continued to improve. It noted that 'some' further gradual rate hikes would be needed, a subtle change that suggested it was preparing to stop raising borrowing costs'

In a statement issued after the end of its last policy meeting of the year, the Fed said risks to the economy were 'roughly balanced' but that it would 'continue to monitor global economic and financial developments and assess their implications for the economic outlook.'

The rate hike, the fourth of 2018, lifted the target range for the Fed’s benchmark overnight lending rate by a quarter of a percentage point to a range of 2.25 percent to 2.50 percent.

The dow jones index is trading in a downtrend on an intra-day time frame (8-hour time frame). As per our report yesterday, the price touched both the dovish and hawkish levels. At the open, the price rallied and kissed the level of 2400 but then it retraced and made a low of 2304 just shy of our target which is at 2,2947.

The downtrend is confirmed by the orange trend line and as long as the price stays below this line, the downtrend would remain intact. The further confirmation of the downtrend comes from the fact that the price is trading below the 50 and 100-day moving averages (shown in yellow and green).

The RSI is trading near an oversold zone and this means that the bulls may just step in and we may see a small correction.

The support zone is shown by the green horizontal line
The resistance zone is shown by the red horizontal line

The FTSE 100 index is has broken out of its consolidation zone on an intraday time frame (8-hour time frame). Fortunately for the bears, the break out is to the downside and this confirms that the bears are in strong control of the price. Having said this the price is trading really close to its major support zone and at the same time, we also have an oversold signal coming from the RSI. Combined together, this sends a powerful message for the bulls that there may be an opportunity here. However, if the price breaks the current support zone, it will confirm more weakness and it is likely that the may continue its move towards the next major support which is at 6500.

The minor support zone is shown by the dotted horizontal green line
The major support zone is shown by the solid horizontal green line
The resistance zone is shown by the red horizontal red line

In the post meeting press conference, BoJ Governor Haruhiko Kuroda warned of downside risks to the economy "particularly via overseas economic developments". He added, "if trade frictions persist, that could have a broad impact on Japanese and overseas economies." Nevertheless, he also pointed to tankan survey and BoJ's internal hearings, and noted "trade frictions on Japan's economy is limited for now". There is so far no change in the view that the economy is "expanding moderately". Also, " momentum for achieving our price target is sustained."

Kuroda also sounded open to more easing and noted "If we think doing so would be necessary to sustain the momentum for achieving our price target, we will ease monetary policy further as appropriate." The options for additional easing include cutting the short-term interest rate target, lowering the long-term yield target, ramping up asset buying and accelerating the pace of increase in base money.

European markets and US futures are set to decline after U.S. equities plunged as the Federal Reserve chairman Jerome Powell failed to quell investor concerns that tightening policy will choke economic growth. Basically, the Fed has simply brushed away all the pressure which President Trump tried through his Twitter.

Tensions increased among investors when the Fed signalled that gradual rate hikes in 2019 are still going to take place and this was enough to squash all the optimism. Even though the pace of the rate hike isn’t going to be the same as this year but investors have serious qualm that this is going to create grave liquidity issues.

It is likely that the stocks would continue their tumble until the dust settles. Looking at the gold price action, it becomes clear that investors were quick enough to shave the profit, hence the price retraced from its high of 1260. However, there is still a lot of momentum and it is likely that the bulls may start to push the price higher as the price is still staying near its one week high. In other words, the path of least of resistance is skewed to the upside and the move could be gradual. This is because panic has already taken over and the Asian markets have entered in a bear market territory, down over 20% from their peak.

Havens are going to remain in demand with yen an gold being the most favourable instruments. Of course, VIX is your instrument and there is a clear spike there. We expect volatility for the European stocks to also spike as the market opens. The option’s markets suggest that there is still some juice left in this trade as the downside protection is still expensive.

As we said before, the cracks which are surfacing in the economic data over in the U.S. are only going to things more difficult and there may be no surprise if the Fed is forced to make a U-turn next year

• Famous dot plot indicates two rates hike next year at the FOMC policy meeting
• Bank of England to hold rates steady amid Brexit drama
• EU and Italy find a common ground on budget plan

Fed not so dovish as expected

Shares in the US and Asia tumbled after the Federal Open Market Committee raised interest rates by a quarter point to 2.25-2.5% in a widely expected decision and hinted further tightening next year despite the hazards in global economic conditions. The central bank little changed its projections for 2019 as well, downgrading growth to 2.3% and inflation to 1.9%, but investors, who were anticipating the worst from the Fed – from no hike to just one versus three displayed by the September’s dot plot – were surprised to hear that policymakers are still aiming for two rate hikes in 2019, with the Fed chief Jerome Powell saying at his press conference that the US economy performed satisfactorily this year and hence policy no longer needed to be accommodative.

Markets though did not seem much convinced about whether the Fed could keep course on its agenda, driving dollar/yen down by 0.52% on Thursday near two-month lows, while the safe-haven gold was gaining 0.36% in the day after hitting five-month highs on Wednesday. A sign that investors could turn more vulnerable to upcoming data releases which could potentially affect rate hike prospects. Headlines that People’s Bank of China lunched a new tool on Wednesday to boost lending to small and private companies amid a slowing economy and trade restrictions from Washington weighed on sentiment as well.

Unlike the Fed, the Bank of Japan which held its policy meeting a few hours later, kept borrowing costs unchanged and reiterated that current stimulus will be maintained for an extended period of time.

Bank of England next to decide on rates

The Bank of England will be next in line to decide on monetary policy on Thursday at 1200 GMT but analysts are certain that policymakers will judge wiser to stand pat on rates as far as Brexit remains unsolved. While the UK Prime Minister, Theresa May, has survived a leadership challenge last week, she still needs to achieve assurances from the EU over her Brexit deal and win the support of ministers in the homeland before the exit date in March. Yet with both sides preparing strategy plans for a no-deal Brexit it seems that the EU is not willing to soften its stance by allowing changes in the withdrawal bill agreed with the UK PM even If the majority of British lawmakers are against it.

On Wednesday, May announced that the delayed Brexit vote in the Parliament will be rescheduled in the week ending January 14.

Meanwhile in FX markets, cable is trading higher by 0.34% so far in the day, benefitting on the back of a weaker dollar. While the BoE meeting is not expected to affect much the pound as no press conference or a new quarterly inflation report are scheduled to be delivered today, a more cautious outlook in the rate statement may pressure the currency. Yet retail sales numbers out of the UK at 0930 GMT could spur some volatility to the market.

Italy avoids EU sanctions

On Wednesday, the Italian Prime Minister, Giuseppe Conte, revealed that the government reached a compromise with the EU to reduce the deficit target to 2.04% of GDP in 2019 from 2.4% proposed previously, without dramatic changes in key budget components. Although the agreement is not the ideal one according to the European Commission, it protects Italy from disciplinary procedures. Yet the European Commission’s Vice President Valdis Dombrovskis argued that the composition of the spending plan is still a concern and could result in higher costs in coming years once implemented.

The euro was among the best performers today, changing hands higher by 0.47% against the greenback.

Other highlights

The loonie hit 20-month lows yesterday versus the dollar and remained around that troughs on Thursday as the sharp sell-off in oil markets continued, with WTI crude and the London-based Brent diving by more than 2.5% on Thursday on oversupply concerns and as stock markets melted again. Moreover, the headline CPI figure for the month of November eased to the lowest in 10 months on a yearly basis, while the core measures also appeared weaker, suggesting that the Bank of Canada might not be in hurry to pick up rates.