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A sense of caution and unease continues to linger across financial markets this morning as jittery investors brace for the Federal Reserve's interest rate decision later in the day.

Global equity markets are poised to remain turbulent for the rest of the week thanks to global growth fears, lingering trade concerns, Brexit turmoil and heightened political risk in Europe. With geopolitical risk factors not only fuelling market pessimism but also placing investors on an emotional rollercoaster ride, hopes for a Santa Clause rally seem to be fading by the day.

UK CPI to offer short-term distraction from Brexit

The Pound's fortunes clearly remain tied to the outcome of the Brexit vote in Parliament during the week of January 14.

However, November'spending CPI report could offer a short-term distraction as investors re-direct their attention back to fundamentals. Inflation in the United Kingdom is expected to cool to 2.3% from 2.4%. Signs of easing inflationary pressures will be seen as a welcome development for consumers, especially when considering how average earnings have increased by 3.3% - theirhighest level in 10 years.

In regards to the technical picture, Sterling bulls have beenclearly in the driver's seat in recent days despite Brexit uncertainty and political instability in Westminster weighing on sentiment. A weaker Dollar is clearly the primary driver behind the GBPUSD's upside and this continues to be reflected in price action. Although the GBPUSD could push higher in the short term, gains remain capped below the 1.2700 resistance level.

Dollar shaky ahead of Fed meeting

Today's main risk event for financial markets will be the Federal Reserve's highly anticipated monetary policy announcement this afternoon.

With a rate hike in December already heavily priced in, investors will be more concerned with the policy statement, dot plots and press conference for clues on the Fed's hiking path next year. While it seems quite unusual for the Federal Reserve to raise interest rates in such unfavourable global market conditions, recent economic data such as GDP, US housing starts and unemployment suggest that the US economy remains solid. With Fed policy makers expressing a more cautious tone in recent weeks, expectations remain elevated over the Federal Reserve moving forward with a ‘dovish hike'. The Dollar has the potential to depreciate further if the line ‘further gradual increase' is omitted from the statement and the dot plot projections from September are revised lower from three to two for 2019.

Commodity spotlight – WTI Oil

Oil prices were under extreme selling pressure yesterday as risk aversion compoundedwith oversupply fears and concerns over weaker Oil demand.

WTI Crude collapsed like a house of cards with prices sinking to a fresh yearly low of $45.77, while Brent fared slightly better with prices hovering around $60 as of writing. With markets struggling to find signs of Oil market stabilizing after OPEC and Russia's deal to cut production by 1.2 million barrels per day and global growth fears worsening matters, the outlook for Oil remains fundamentally bearish. In regards to the technical picture, WTI Crude is unquestionably bearish on the daily and weekly charts. The downside momentum is likely to send prices towards $45 in the near term.

The pair holds in red for the fourth straight day and returns below daily cloud after bears failed to close below key supports at 112.46/40 (daily cloud base / Fibo 61.8% of 111.37/114.20 / 100SMA) on Tuesday, despite spike to 112.24.

Strong support from double-bottom at 112.23 (06/10 Dec lows) contained Tuesday’s dip, but was cracked on today’s spike to 112.18, signaling that bears remain firmly in play.

Eventual close below 112.46 Fibo support which so far resisted several attacks, would generate strong bearish signal for test of another pivot at 112.04 (Fibo 76.4% of 111.37/114.20).

Bearish daily studies support scenario, but oversold slow stochastic suggests that bears may show further hesitation at key support levels.

Markets look for fresh signals on FOMC decision, due later today. Wide expectations that the Fed will hike in Dec, as promised, but would signal significant slowdown in rate hikes in 2019, on growing fears of global growth slowdown.

Another scenario of Fed staying on hold today, is also in play, as the central bank is under strong pressure from US President Trump, who strongly opposes any further increase in interest rates, however, the Fed may act to show their independence.

Scenario of dovish hike or no hike at all would further pressure the dollar, while bears could be sidelined if Fed opts for hike and makes hawkish shift in their statement.

Res: 112.46, 112.60, 112.95, 113.08
Sup: 112.18, 112.04, 111.77, 111.37

It is the decision day, yes, it is today when the Federal Reserve over in the United States will meet and make a decision which will not only have an impact in the U.S. but the ripple effects of this are felt throughout the world. The committee is going to deliver a verdict which is bound to make the president of the United States even angrier. President Trump made it clear in his tweet yesterday he is not pleased with the Fed’s decision. For now, the Fed has decided to brush aside any pressure and maintained their independence.

U.S. central bankers are meeting in Washington and they are expected to raise the interest rates for the last time this year. They have already increased the interest rates three times this year. The Federal Open Market Committee is broadly expected to raise the interest by a quarter point, a range of 2.25 percent to 2.5 percent, the highest in a decade. This is all baked in the markets and traders are not going to be surprised by this decision even though Donald Trump may be.

The Statement

What is more important for today is the policy statement at 2.30 p.m. because it is then when we could hear something new from the Fed. Jerome Powell, the Fed president will provide the forward guidance and he might alter or drop a commitment for any further gradual hikes in 2019.

Investors are clearly betting heavily on this move and it is something which is going to set the tone for the Q1 of 2019. The Fed has achieved their goal of maximum employment and met their inflation target so they are committed to gradually tightened their monetary policy. However, like any other central bank, they want to keep the flexibility in their monetary policy as this helps to avoid unpleasant surprises.

What Is Aggressive & Dovish

Market participants widely expect the statement to be somewhat dovish and the markets believe that going into 2019, the Fed isn’t going to be this aggressive because of the tighter financial conditions. Mr Powell is likely to indicate two or maximum three rates hikes in 2019. For investors, one to two rate hikes would be considered more dovish to neutral but two to three rate hikes would be aggressive because the economic indicators have started to flash warning light with respect to any aggressive monetary policy.

The Trade

In terms of trading the event, aggressive tone by the Fed would be negative for the equity market and the sell-off may become intense. The Dow Jones may take a nose dive and the move could in the range of 300-500 points. However, a dovish statement could support the equity markets and it would restore some confidence so investors expect about 150-250 points move for the Dow on the back of this.

In the forex market, the dollar could easily make another high for the year if the statement is neutral to hawkish. A strong dollar would have the most impact against the euro and sterling, both of them are already very weak because of their internal issues- Brexit and Italian debt situation.

In the commodity space, do not expect the gold price to drop even if the statement is neutral to hawkish because this would trigger a risk-off trade and gold would become a favourable hedge against the risk. I don’t expect the gold price to move below $1,235. On the flip side, if the statement is dovish, the upside would also be moderate and the price may just struggle to touch the $1,265 to $1,270 mark.

UK CPI slowed to 2.3% yoy in November, down from 2.4% and matched expectations. But core CPI also slowed to 1.8% yoy, down from 1.9% yoy and missed expectation of 1.9% yoy. RPI also slowed to 3.2% yoy, down from 3.3% yoy and missed expectation of 3.3% yoy.

PPI input slowed to 5.6% yoy, down from 10.3% yoy, below expectation of 9.6% yoy. PPI output slowed to 3.1%yoy, down from 3.3% yoy, matched expectations. PPI output core slowed to 2.4% yoy, down from 2.5% yoy, above expectation of 2.3% yoy.

House price index slowed to 2.7% yoy in October, missed expectation of 3.3% yoy.

EUR/GBP is a touch higher after the release, but there is no follow through selling in the Pound.

The FOMC is expected to hike rates today (19:00 GMT) by 25 bp elevating its interest rate to the level of 2.50%, and currently FFF currently imply a probability for such a scenario of 71.9%. Should the bank hike rates as expected the market's attention could turn to the bank's future intentions and forecasts about the US economy. Caution seems to be dominating the market, as it currently prices in only one rate hike in 2019 enhancing worries that the Fed might slow down its rate hike path for 2019 and/or revise its forecasts for the US economy downwards. President Trump's critical comments, provided further confusion, however it should be noted that in the past the Fed had ignored such criticism. Analysts point out that the scenario of a dovish rate hike, currently keeps the USD in check and should today's decision surprise the market we could see increased volatility for the USD. Please be advised that volatility for the USD could also extent during Fed Chairman Powell's press conference (19:30, GMT). USD/JPY kept a sideways movement yesterday, staying between the 112.72 (R1) resistance line and the 112.15 (S1) support line. Yesterday's range bound movement, was considered as calmness before the storm, as the pair could prove sensitive to the FOMC interest rate decision today and should the market be surprised either way we could see increased volatility affecting the pair. Should the pair come under the selling interest of the market, we could see it breaking the 112.15 (S1) support line and aim for the 111.65 (S2) support barrier. Should on the other hand, the market favor the pair's long positions, we could see the pair breaking the 112.72 (R1) resistance line and aim for the 113.25 (R2) resistance hurdle.

Is Italy close to a deal with Brussels?

Media, report that Italy may be close to a preliminary deal with Brussels regarding the level of its budget deficit. The reports stated that according to Italian sources, the Italian government has reached a technical deal with the EU which still needs to be ratified by the EU though. Parameters of the prementioned deal seem to show agreement being reached midway, as the Italian government has shaved off its spending plans. Should the reports be correct, we could see announcements being made even today, ahead of the Eurogroup meeting and could provide a positive sentiment for the common currency. EUR/USD rose yesterday testing the 1.1385 (R1) resistance line. Technically the pair's upward trend, incepted since Friday afternoon, could argue for a bullish outlook for the pair's direction, however we expect the FOMC interest rate decision, as well as European fundamentals to influence the pair's direction. Should the bulls continue to reign over the pair's direction, we could see it breaking the 1.1385 (R1) resistance line and aim if not break the 1.1425 (R2) resistance level. Should on the other hand the bears take over, we could see the pair, breaking the 1.1345 (S1) support line and aim for the 1.1305 (S2) support zone.

In today's other economic highlights:

During the European session today, we get Germanys PPI growth rate for November and the UK inflation measures, also for November. In the American session, we get from the US the current account balance for Q3 and the number of existing home sales for November. From Canada we get the main inflation rates for November and just ahead of tomorrow's Asian session, we get New Zealand's GDP growth rate for Q3 and the trade balance figure for November. Also please bear in mind that the EIA crude oil inventories figure will also be released and could affect oil prices. Should be interest in the recent drop of oil prices and the fundamentals surrounding black gold, please refer to our 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)

USD/JPY H4

Support: 112.15 (S1), 111.65 (S2), 111.15 (S3)

Resistance: 112.72 (R1), 113.25 (R2), 113.95 (R3)

• The spotlight today is on the Fed’s decision; markets seem positioned for an extremely “dovish hike”, which poses an upside risk for the dollar
• The BoJ will also meet, though that gathering may be less exciting
• Meanwhile, oil prices resumed their broader collapse

Fed may strike a less dovish tone than investors anticipate

The main event today will be the Fed’s policy decision at 1900 GMT, which will be followed by a press conference from Chair Powell. A quarter-point rate increase is widely expected and assuming no surprises there, the focus will turn to the accompanying statement, the rate projections for 2019, and Powell’s remarks. Markets seem positioned for a “dovish hike”, where the Fed raises rates but lowers it rate-path projections for next year and strikes a cautious tone.

Market pricing is extremely dovish. Assuming a hike is delivered today, investors assign less than a 30% probability for a single rate increase in the whole of 2019, which is worlds apart from the three hikes the Fed penciled in back in September. More importantly, US economic data remain healthy overall, hardly supporting a pricing this dovish. Therefore, although the Fed may indeed revise down its rate forecasts today, it’s unlikely to go as far as signal the broader pause in rate hikes that market pricing currently implies, consequently generating an upside risk for the dollar.

Specifically, the risks surrounding the dollar may be asymmetric, and skewed to the upside. Given the market’s pessimism, a downward revision in the rate forecasts won’t be much of a surprise and is thus unlikely to generate a major reaction, with any losses staying fairly limited. On the flipside, if the projections are kept unchanged or Powell pushes back against this dovishness, it would be a surprise, and the greenback could therefore soar.

BoJ decision next on the agenda after Fed

With so much focus on the Fed, the BoJ’s own policy meeting – which will conclude during the Asian session on Thursday – has flown largely under the radar. And with good reason, as it seems quite unlikely to prove exciting. The Japanese inflation picture remains subdued and the economy contracted in Q3, both of which argue for no change in the Bank’s massive stimulus program.

As for the yen, it probably won’t respond much if the BoJ simply maintains its policy and tone unchanged; it may instead continue to be driven mainly by shifts in global risk appetite given its safe-haven status. Note though, that if there is going to be any change in the BoJ’s tone, it may be towards a more cautious-sounding narrative.

Oil resumes freefall

After a brief lull in recent weeks, oil prices resumed their broader collapse on Tuesday, with both WTI and Brent breaking decisively below their recent lows. Optimism that OPEC production cuts would be enough to stabilize the market has faded, given the cartel’s inability to deliver a major reduction, and fears of a supply glut have resurfaced. This, at a time when global risk sentiment remains fragile, adding another dimension to the precious liquid’s troubles.

With OPEC having just met, it’s difficult to envision a scenario under which oil prices rebound in the near-term, barring some unforeseen supply outage or a substantial recovery in risk appetite. Attention now turns to the weekly EIA data, due today at 1530 GMT. Market chatter suggests these figures may improve in coming weeks as Saudi Arabia will reduce its exports to the US to prevent a further buildup in stockpiles. Although this is by no means significant from a global perspective, it may be enough to support sentiment in the short-term and gradually help prices stabilize.

UK and Canadian inflation data due

On the data front, the highlights today will be inflation data for November out of the UK and Canada. The UK figures will be scrutinized ahead of the Bank of England’s policy gathering tomorrow, though note that politics are more important than economics for the pound right now.

As for the Canadian prints, even if they surprise to the upside, any rallies in the loonie may remain relatively short-lived in an environment where crude prices remain under pressure.

New Zealand’s GDP data for Q3 are also due.

Cable stands at the front foot and holding under Asian session high at 1.2678, ahead of release of UK CPI data.

Strong upside rejection on Tuesday at 1.2700 zone (Fibo 61.8% of 1.2839/1.2476/falling 20SMA) warns of recovery stall, as daily techs are bearishly aligned, but weaker dollar underpins for now.

Forecast for UK inflation shows slowdown in Nov (y/y 2.3% f/c vs 2.4% prev) and pound could be hurt on weaker than expected figure.

Broken 10SMA (1.2627) marks solid support, which needs to hold and keep recovery attempts alive, however, near-term outlook would remain weak while 1.2700 barrier caps.

Break of either side would provide fresh direction signal. End of two-day FOMC policy meeting and their decision amid wide expectations for dovish hike and strong pressure on Fed from President Trump not to hike at all, is the key event today.

Res: 1.2678, 1.2700, 1.2753, 1.2766
Sup: 1.2657, 1.2627, 1.2609, 1.2564

The Euro holds bid tone on Wednesday ahead of today’s key event – Fed policy decision.

Fresh bullish acceleration in early European trading penetrates thick daily cloud, after Tuesday’s violation of cloud base was short-lived.

Fears of global growth slowdown, signaled by weak data from EU, China, fall in oil prices and persisting concerns over US/China trade dispute , keep the dollar under pressure and continue to underpin the Euro.

FOMC decision, due later today, is in focus for fresh signals. Wide expectations go for dovish hike, as Fed signaled rate hike in Dec but would slow the pace of hikes in 2019, but also strong pressure on Fed not to hike rates, soured risk sentiment.

The pair generated bullish signal on Tuesday’s close above converged 10;20;30 SMA’s (which now act as support at 1.1355 zone), with probe into daily cloud and cracking falling 55SMA (1.1400) adding to positive signals, but flat momentum on daily chart warns that bulls may run out of steam.

Today’s close in daily cloud is needed to signal bullish continuation towards next pivot at 1.1444 (Fibo 38.2% of 1.1815/1.1215 / 10 Dec spike high).

Res: 1.1405, 1.1444, 1.1472, 1.1500
Sup: 1.1388, 1.1355, 1.1336, 1.1298

XAUUSD (1250.91): Gold prices maintained the strong bullish momentum. Price action has managed to clear the previous highs near 1248.00. This could potentially signal further upside. The next main target for gold comes in at the 1280 level. However, for further gains to be established, gold needs to form support at the 1248 region. There is also a risk that the current upside momentum could falter. In this case, we expect gold prices to potentially risk posting a correction toward the 1227 - 1228 level of support.

GBPUSD (1.2653): The GBPUSD currency pair was seen edging higher on Tuesday. Price action was seen retesting the breached support level at 1.2683 where resistance is currently formed. Failure to breakout above this level could keep price action subdued. We expect the GBPUSD to maintain the range within 1.2683 and the lows of 1.2491 where support looks to have been formed. There is scope for an upside breakout given the ascending triangle pattern being formed. This would give a minimum upside target toward 1.2806.