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During the previous trading session, the US Dollar passed through the support level of the monthly S1 at 112.47 mark to end the trading day near the 50.00% Fibonacci retracement level.

Most likely, the US Dollar will get retraced by the resistance level of the monthly S1 at 112.47 mark to pass through the support level of the ascending dominant pattern line to trade at the 111.80 level.

On the other hand, during today's US FOMC meetings at 19:00 GMT, the rate could break the resistances most of the technical indicators to trade at the 112.80 level.

During Wednesday's morning hours, the yellow metal kept trading upwards to stay near the resistance level of the ascending small pattern line at 1,252.00 level.

It is expected that the rate will continue trading upwards to reach the 1,254.00 level during the trading day. Note, none of the technical indicators could prevent the gold from the surge.

However, during today's US FOMC meetings at 19:00 GMT, the US Dollar could appreciate against the yellow metal to push the rate to trade downside towards the 38.20% Fibonacci retracement level at the 1,245.07 mark

Notes/Observations

• FOMC expected to raise rates by 25bps for its 4th hike of 2018 but to modify the forward guidance language with next year rate hikes to be data dependent
• Italy Govt appeared to have reached an agreement on its 2019 budget with EU Commission, BTP yields lower by over 10bps

Asia:

Japan Nov Trade Balance registers a larger deficit; exports slow to crawl on global slowdown, trade tensions: (-¥737.3B v -¥630Be; Adjusted Trade Balance: -¥492.2B v -¥275.9B; Exports Y/Y: 0.1% v 1.2%e; Imports Y/Y: 12.5% v 11.8%e)

• China Commerce Ministry (MOFCOM): China and US have spoken on the phone recently (Wed, Dec 19th) on trade and economy on a Vice Min level

Europe:

• Italy government said to have indicated that EU commission had accepted 2019 budget deficit of 2.04%. Italy PM Office stated that the govt only received verbal assurances from EU Commission over budget deal but reasonable to expect positive outcome at Wednesday's EU commission meeting. Italy PM Conte or Fin Min Tria to address Parliament on Wed, Dec 19th if EU decided on the budget
• France Stats Agency (INSEE): cut its 2018 GDP growth forecast from 1.6% to 1.5% due to protests and soft business confidence

Americas:

• Treasury Sec Mnuchin: goal is to document a trade agreement with China by March 1st (the end of the 90 day cool off period on tariffs)

Energy:

• Weekly API Oil Inventories: Crude: +3.5M v -10.2M prior

Macro

• (US) United States: As expected the Democrats rejected the bill offered by Senate Leader McConnell, leaving him to go back to the White House to see what the President is "willing to sign." McConnell believes there won't be a partial shutdown expecting a short-term fix, which the Democrats would "very seriously consider," according to Schumer. The initial offer was rejected as it contained a "$1B slush fund" for Trump immigration policies, which wouldn't pass either house. Avoiding a government shutdown with a short-term spending bill before the year end recess is obviously the best solution, but this is the first major power play since the mid-terms, which saw the House flip back to the Democrats from next year.
• (DE) Germany: According to Destatis the price adjusted stock of unfilled orders in the German manufacturing sector increased 0.6% m/m, with domestic orders actually falling -0.3% and foreign orders rising 1.0%. The rise in October means companies are sitting on orders that will generate up to 5.5 months of work. It suggests that recent weakness in data will translate into stagnation at relatively high levels of capacity utilization as opposed to a full blown slowdown.
• (EU) Eurozone: ECB's Hansson said they aren't planning any additional measures 'at this point'. He added that if the economy develops in line with the baseline scenario the ECB's rate guidance won't change. There have been some conflicting messages since the last meeting that highlighted diverging viewpoints at the council. While Nowotny argued for a quick end to the negative interest rate policy, fellow council member Makuch yesterday was decidedly more dovish.

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

• Indices [Stoxx600 +0.41% at 341.84, FTSE +0.80% at 6,754.88, DAX +0.42% at 10,786.16, CAC-40 +0.42% at 4,773.88, IBEX-35 +0.85% at 8,775.00, FTSE MIB +1.02% at 18,835.50, SMI +0.39% at 8,547.90, S&P 500 Futures +0.78%]

Market Focal Points/Key Themes:

• European Indices trade mostly higher this morning led by the FTSE MIB on the back of a budget deficit target agreement with the EU.
• US Index futures also higher after finishing near the lows yesterday. In the UK, November inflation readings were in line with forecasts, ahead of tomorrow's BoE rate decision.
• On the corporate front, Ceconomy trades sharply lower after Q4 results and 2019 outlook; Gurit and Galenica also fall after cutting its outlook. XXL in Norway falls over 40% after a poor fourth quarter; Gulf Marine Serives sheds two thirds of its value after its trading update. Meanwhile Glaxosmithkline trades over 7% higher after a JV with Pfizer; Flybe also rises after Virgin Atlantic reviewing its options on the company.
• Looking ahead notable earners include General Mills, Winnebago, Paychex and NCi Building Sytems.
• Consumer discretionary: Flybe Group [FLYB.UK] +15%, IAG [IAG.UK] +1% (Virgin Atlantic Ltd confirms that it continues to review its options in respect of Flybe), XXL ASA [XXL.NO] -40% (trading update; CEO steps down), Kappahl Holdings AB [KAHL.SE] -1.5% (earnings), 888 Holdings [888.UK] +8% (trading update)
• Financials: Burford Capital [BUR.UK] +19% (funding arrangements)
• Healthcare: Glaxosmithkline [GSK.UK] +7% (JV with Pfizer), Novartis AG [NOVN.CH] +0.5% (agreement), Molecular Partners [MOLN.CH] +16% (collaboration), Asit Biotech [ASIT.BE] -9% (shareholders vote down on proposition)
• Industrials: Ceconomy [CEC.DE] -11% (earnings; initial guidance; suspends dividend), Gulf Marine Services [GMS.UK] -66% (trading update)
• Telecom: Tamedia [TAMN.SE] +2.5% (divestment)

Speakers

• ECB's Nowotny (Austria): Most concerned over decline in German growth; most affected by geopolitical risks and trade concerns. Believed that Italy govt policies are not sustainable
• ECB’s Hansson (Estonia) stated that the central bank did not foresee any additional measures at this point. Rate guidance would not change if economy follows the base-line scenario
• France Fin Min Le Maire: 2019 budget deficit to GDP ratio seen at 3.2%
• Saudi Arabia Central Bank official: No plans to change exchange rate; FX reserves are very adequate
• Thailand Central bank Policy Statement noted that the vote to hike by 25bps was 5-2. Policy remained accommodative . Rate hike to build policy space and curb financial stability risks. Domestic economy continued to gain traction and reiterated view that THB currency (Baht) was moving in-line with regional peers
• India govt official: To seek an extra INR400B for recapitalization of State-run banks
• China PBoC stated that market interest rates were stable and that Open Market Operations (OMO) helped to keep reasonable and ample liquidity

Currencies/ Fixed Income

• USD was under slight pressure ahead of the FOMC rate decision but remained locked within recent ranges. The majority of analysts expect the Fed to raise interest rates for the fourth time this year, but reiterate that next year rates would be raised dependent on the economic data (aka dovish hike).
• EUR/USD was higher by 0.4% to move back above the 1.14 level. The Euro aided by the alleged compromise between Italy and EU on the 2019 budget. Italy lowered its 2019 budget deficit from its original 2.4% ceiling to 2.04% to prevent the EU Commission from launching an excessive deficit procedure against the country
• GBP/USD was little changed as inflation data continued to improve towards the BOE target and was expected to move back within it in 2019. Focus on Thursday BOE rate decision but no changes expected with the looming Brexit uncertainty

Economic Data

• (DE) Germany Nov PPI M/M: +0.1% v -0.1%e; Y/Y: 3.3% v 3.1%e
• (TH) Thailand Central Bank (BoT) raised its Benchmark Interest Rate by 25bps to 1.75% (as expected) for its 1st hike in seven years
• (ES) Spain Oct Total Mortgage Lending Y/Y: 13.9% v 15.4% prior; House Mortgage Approvals Y/Y: 20.4% v 9.5% prior
• (SE) Sweden Dec Consumer Confidence: 96.4 v 97.8e; Manufacturing Confidence: 116.3 v 115.0e; Economic Tendency Survey: 106.3 v 106.3e
• (PL) Poland Nov Sold Industrial Output M/M: -3.6% v -4.0%e; Y/Y: 4.7% v 4.2%e; Construction Output Y/Y: 17.1% v 16.7%e
• (PL) Poland Nov PPI M/M: -0.5% v -0.1%e; Y/Y: 2.7% v 3.1%e
• (IL) Israel Dec 12-month CPI Forecast: 1.2% v 1.1% prior
• (UK) Nov CPI M/M: 0.2% v 0.2%e; Y/Y: 2.3% v 2.3%e; CPI Core Y/Y: 1.8% v 1.8%e; CPIH Y/Y: 2.2% v 2.1%e
• (UK) Nov RPI M/M: 0.0% v 0.1%e; Y/Y: 3.2% v 3.2%e; RPI-X (ex-mortgage interest payments) Y/Y: 3.1% v 3.2%e; Retail Price Index: 284.6 v 284.7e
• (UK) Nov PPI Input M/M: -2.3% v -2.8%e; Y/Y: 5.6% v 5.0%e
• (UK) Nov PPI Output M/M: 0.2% v -0.1%e; Y/Y: 3.1% v 3.0%e
• (UK) Nov PPI Output Core M/M: 0.1% v 0.1%e; Y/Y: 2.4% v 2.3%e
• (UK) Oct ONS House Price Index Y/Y: 2.7% v 3.3%e
• (EU) Euro Zone Oct Construction Output M/M: -1.6% v +2.1% prior; Y/Y:1.8 % v 4.6% prior

Fixed Income Issuance

• (IN) India sold total INR150B vs. INR150B indicated in 3-month, 6-month and 12-month bills

Looking Ahead

• (UR) Ukraine Q3 Final GDP Q/Q: No est v 0.4% prelim; Y/Y: 2.8%e v 2.8% prelim
• (IT) EU Commission discussing Italy’s budget
• 05:30 (CL) Chile Central Bank (BCCh) Dec Minutes
• 05:30 (EU) ECB Long-Term Refinancing Operation Result
• 06:00 (UK) Dec CBI Industrial Trends Total Orders: 8e v 10 prior; Selling Prices: 8e v 9 prior
• 06:00 (PT) Portugal Nov PPI M/M: No est v 0.4% prior; Y/Y: No est v 4.8% prior
• 06:00 (IT) Italy PM Conte in parliament on 2019 budget
• 06:45 (US) Daily Libor Fixing
• 07:00 (RU) Russia to sell total RUB25.0B in OFZ bonds on Dec 19th (3 tranches)
• 07:00 (US) MBA Mortgage Applications w/e Dec 14th: No est v 1.6% prior
• 08:00 (RU) Russia Nov Unemployment Rate: 4.8%e v 4.7% prior; Real Disposable Income: 0.6%e v 1.4% prior; Real Wages Y/Y: 4.2%e v 4.4% prior
• 08:00 (RU) Russia Nov Real Retail Sales Y/Y: 2.1%e v 1.9% prior
• 08:10 (UK) Baltic Dry Bulk Index
• 08:30 (US) Q3 Current Account Balance: -$125.0Be v -$101.5B prior
• 08:30 (CA) Canada Nov CPI M/M: -0.4%e v +0.3% prior; Y/Y: 1.8%e v 2.4% prior; CPI Core- Common Y/Y: 1.9%e v 1.9% prior; CPI Core- Median Y/Y: No est v 2.0% prior; CPI Core- Trim Y/Y: No est v 2.1% prior; Consumer Price Index: 133.9e v 134.1 prior
• 09:00 (BE) Belgium Dec Business Confidence: -0.9e v +0.4 prior
• 09:00 (MX) Mexico Q3 Aggregate Supply and Demand: 3.4%e v 4.0% prior
• 09:30 (BR) Brazil weekly Currency Flow data
• 10:00 (US) Nov Existing Home Sales: 5.20Me v 5.22M prior (revised from 5.23M)
• 10:30 (US) Weekly DOE Crude Oil Inventories
• 14:00 (US) FOMC Interest Rate Decision: Expected to raise the band by 25bps to 2.25-2.50% range
• 14:00 (AR) Argentina Nov Trade Balance: No est v $0.3B prior; Total Exports: No est v $5.4B prior; Total Imports: No est v 5.1B prior
• 14:30 (US) Fed Chair Powell holds post rate decision press conference
• 15:00 (MX) Mexico Citibanamex Survey of Economists

The US dollar currency remains weak against the Japanese yen ahead of the Federal Open Market Committee interest rate decision and policy statement later today. The USDJPY is holding below key trendline support, although sellers have to break the important 112.20 technical region. Technical indicators for the USDJPY pair are moving into oversold territory across the lower time frames, although price-action is still bearish.

The USDJPY pair is strongly bearish while trading below the 112.45 level, key technical support is found at the 112.20 and 111.30 levels.

If USDJPY buyers move price above trendline resistance, a corrective rally towards the 112.80 and 113.20 levels remains possible.

The euro has continued to advance against the US dollar during the European trading session, with price testing demand above the important 1.1400 level. The EURUSD pair has so far been contained by trendline resistance from the triangle pattern across the lower time frames. If the FOMC strike a dovish tone the EURUSD pair should rally, a more hawkish tone should support US dollar strength.

The EURUSD pair is strongly bullish while trading above the 1.1400 level, key technical resistance is found at 1.1470 and 1.1550 levels.

If the EURUSD pair falls from the 1.1400 level, sellers are likely to test the 1.1360 and 1.1330 support levels.

The Bank of Japan (BoJ) will conclude its latest policy meeting during the Asian session on Thursday. No change in its massive stimulus program is expected, and considering that inflation remains subdued, any hints of future normalization are unlikely too. Hence, the yen probably won’t respond much, and may instead continue to be driven mainly by shifts in global risk appetite.

Under its current framework of “QQE with yield-curve control”, the BoJ has pledged to keep the yields on longer-dated Japanese government bonds fixed around 0% in an unprecedented attempt to stimulate borrowing and investment in Japan – and through those, boost inflation. Alas, despite the Bank’s best efforts, inflation has remained stubbornly low – data due on Thursday (2330 GMT) is expected to show the core CPI was unchanged at 1.0% year-on-year in November. This suggests there is little imminent pressure on policymakers to even consider an exit from their massive stimulus program.

On the contrary, the BoJ seems to have every reason to maintain a dovish stance, considering the economy contracted by a sizeable 2.5% in Q3 on an annualized basis. Another similar print in Q4 would mark a technical recession for the economy, defined as two consecutive quarters of contraction, reinforcing the concept that now is probably not the best time for the BoJ to change course.

Indeed, considering also that the government plans to raise the consumption tax rate in October 2019, any policy change from the BoJ seems highly unlikely, not just at this meeting but probably for most of next year as well, absent a dramatic improvement in economic data. The last time this tax was hiked, back in 2014, a recession soon followed as consumer spending collapsed.

As for the yen, it’s unlikely to move much if the BoJ simply maintains its policy and tone unchanged. Instead, the currency may continue to be driven primarily by shifts in global risk sentiment, considering its status as a defensive asset. In recent months, the yen has attracted inflows mainly when trade tensions flared up, or when sell-offs in stock markets intensified to the point where investors sought safety. Yet, the currency has been unable to hold onto gains for long; the haven-boosts it receives tend to be short-lived and fade after a few days. For that to change, it may require an extended period of risk aversion in markets, which could materialize if the latest sell-off in stocks intensifies further, or the US-China trade talks break down.

Technically, dollar/yen could encounter an initial barrier to advances near 112.98, where the 50-day simple moving average is currently located. An upside break may open the way for 113.70, the top of December 13, with even steeper bullish extensions eyeing the 114.15 area, marked by the November peaks.

On the downside, preliminary support may be found at 112.20, the December lows. If the bears pierce below that, declines could stall near 111.35, the October trough.

EURJPY has been moving in a sideways channel over the last month, with strong resistance level the 129.28 barrier and support level the 127.60 region, having as a mid-level the 23.6% Fibonacci retracement level of the downleg from 133.10 to 126.60, around 128.15. Technically, in the 4-hour chart, the RSI indicator is sloping upwards below the threshold of 50, while the MACD oscillator posted a bullish crossover in the negative zone, confirming the recent upside move.

If the market surpasses the 23.6% Fibonacci mark and the 20-simple moving average (SMA) in the 4-hour chart, the pair could meet resistance at the 40-SMA near 128.40. More advances could likely open the way until the 128.90 resistance and the 38.2% Fibonacci mark of 129.10.

On the flipside, if the market manages to turn to the downside and slip below the lower boundary of the trading range of 127.60, attention could turn on the 127.25 support, taken from the low on October 29. A clear run below this area could see the price testing the 126.60 hurdle, registered on October 26.

Overall, looking at the short-term picture, the market is expected to remain neutral for the next sessions.

The US dollar continues to decline against a basket of major currencies. The dollar index (#DX) closed in the negative zone (-0.68%) yesterday. Today, the Fed will decide on the interest rate. The regulator is expected to raise the base interest rate by 0.25 percentage points to 2.25-2.50% per annum. At the same time, investors are worried that the central bank may signal a slowdown in monetary policy tightening. It should be recalled that earlier the US President, Donald Trump, once again criticized the Fed chairman for raising interest rates. We recommend paying attention to the comments by the FOMC officials.

Yesterday, the German IFO business climate index was also published, which counted to 101.0 and was worse than 101.8. Today, the European Commission may approve the new draft budget of Italy for 2019. We also recommend paying attention to the news feed of the UK and Canada.

The "black gold" prices are recovering after the collapse the day before. At the moment, futures for the WTI crude oil are testing the mark of $46.75 per barrel. At 17:30 (GMT+2:00), a report on crude oil inventories will be published in the US.

Market Indicators

• Yesterday, there was a variety of trends in the US stock market: #SPY (-0.11%), #DIA (+0.39%), #QQQ (+0.63%).
• The 10-year US government bonds yield has continued to decline. Currently, the indicator is at the level of 2.81-2.82%.

The news feed on 19.12.2018:

• Consumer price index in the UK at 11:30 (GMT+2:00);
• Core consumer price index in Canada at 15:30 (GMT+2:00);
• Existing home sales in the US at 17:00 (GMT+2:00);
• Fed interest rate decision at 21:00 (GMT+2:00);
• GDP data in New Zealand at 23:45 (GMT+2:00).

American markets remained under pressure on Tuesday. S&P 500 has updated October 2017 lows, increasing losses from the start of the month to 10%.

The dollar index on the decline for the 3rd day in a row amid rumors that the Fed will raise the rate, but would drastically soften its forecasts for monetary policy, inflation and GDP. It is highly unlikely that the Fed will change its mind dramatically, whereas only three months ago it was reported that the rate hike cycle was far from complete.

Consider possible scenarios and market reactions to them:

Scenario 1. The Fed do not touch forecasts for GDP, slightly reduces estimates of future inflation and adjusts to three increases in consecutive rates (as before). This unlikely scenario can cause a sharp increase in the pressure on the stock markets, risking increase bearish trend and the demand for the dollar by sending it to the renewal of the multi-month highs.

Scenario 2. The Fed noticeably reduces forecasts and adjusts for 1-2 increases. In our opinion, this is the most probable scenario. The reaction of the markets in this case will be conditioned by the subsequent rhetoric at the press conference:

A. will it be followed by a pause in increases, it can cause an upward trend on the dollar, and the stock markets in this case receive strong support;

B. Hints that such a pause for upcoming months, and risks of returning to the scenario with three increases. This can have moderate support for US currency, while stock markets are likely to experience some pressure.

Scenario 3. The Fed raises the rate and adjusts to a maximum of one increase next year. Although debt markets consider such a development to be the most probable, it is not particularly in the quotes: it means, in the case of implementation, can greatly weaken the dollar and cause rapid growth of markets.

Scenario 4. The Fed does not raise the stakes. At all. This will be a big surprise for the markets: one that dramatically changes the dollar’s trend, triggering the sale-off, and potentially spurs stock markets.

In conclusion, the Fed is different in that it strives not only to minimize surprises to markets with its actions, but also to try to influence their expectations. Therefore, 2.B Scenario is most likely, as it supported recently with relatively strong domestic indicators, which include the improvement of housing market statistics. At the same time, drop in the energy prices has the potential to increase economic growth, although in short-term it looks like a factor of pressure on the markets.

The Australian dollar attempts again at falling 10SMA (0.7199) which capped Tuesday’s action, but was so far unable to break higher.

Near-term outlook remains mixed, following double-Doji (Mon/Tue) and strong downside rejection last Friday, as the action was contained by daily cloud, but recovery attempts so far lacked strength for stronger advance, as daily studies are weak.

The pair is looking for a catalyst to provide clearer direction signal, with Fed policy decision due later today, seen as key event.

Dovish tone from Fed would pressure the greenback and signal stronger recovery of the Aussie.

Initial bullish signal could be expected on sustained break above 10SMA, with further boost expected from lift above 100SMA (0.7218) and reversal signal on break and close above converged 20/30SMA’s (0.7240).

On the other side, sustained break below pivotal supports at 0.7167/63 (daily cloud base / Fibo 61.8% of 0.7020/0.7393) will be negative signal and could be sparked by hawkish steer from Fed.

Res: 0.7199, 0.7207, 0.7218, 0.7240
Sup: 0.7167, 0.7163, 0.7151, 0.7108