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Long USD short, short USD long

Whither the dollar? Dips are recurring in EUR/USD: these are opportunities to reload long positions. Trader are unlikely to hold risky trades over this weekend, although we anticipate a strong USD close today. Positive sentiment from midterm elections has worn-off. USD is overvalued, yet it derives strength from a white-hot domestic economy and safe haven status. Short sellers are fearful to get in front of the dollar train, as expectations of a late cycle decline have not happened, labour markets continue to tighten, and the Federal Reserve keeps secret its peak interest rate.

The USD/JPY rally should stall after reaching 114.09 high. Zero expectations of a Bank of Japan tightening have created the near perfect funding currency. However, the BoJ says it will manage yield curves in a “flexible manner” allowing for “factors as the range of yield movements”. The wording suggests the central bank might accept greater volatility.

Chinese inflation stable in October despite risk of acceleration

USD/CNY is trading at 6.9475, bouncing back due to resurgent optimism that the China-US trade war might be resolved in late November and on stable Chinese inflation rates. October inflation came in 2.50% (prior: 2.50%): the outlook of a weaker Renminbi will necessarily cause imports to be costlier, which will ultimately accelerate inflation starting in 2019. Hopes are high that US President Donald Trump and Chinese President Xi Jinping can be meet during the G20 meeting in Argentina over 30 November-1 December 2018. Meanwhile, Chinese equities have had a tough week. Following the announcement of lower economic growth in Q3, 6.50% - the lowest since 2009 – the Chinese market has been losing ground. Asian shares are having their sixth slide in seven weeks, thus erasing last week gains.

The Fed kept interest rates steady, as was widely expected yesterday at +2.25% and kept a hawkish tone in the accompanying statement. The bank confirmed its policy of monetary tightening and paved the way for the next rate hike in December. With the Fed reaffirming their stance yesterday, it means that December is very much a closed case for a rate hike. Also, there could be high probabilities following up in similar fashion in 2019. Analysts turned their attention to the divergence of the various bank's policies with the widening interest rate differentials providing worries. Volatility for the USD is expected to continue and could strengthen further as its main rivals seem rather weak.

USD/JPY strengthened following the Fed statement overnight, testing the 113.95 (R1) resistance line. Should the bulls dictate the pair's direction we could see it breaking the 113.95 (R1) resistance line and aim higher for the 114.55 (R2) resistance level. Should on the other hand, the bears take over the pair's direction we could see it aiming for the 113.25 (S1) support line and could even move lower to the 112.72 (S2) support barrier. The pair has shown bullish signs of since the start of November. The pair may prove sensitive to the US financial releases today.

Theresa May targeting a Brexit deal within the next days

PM Teresa May is under pressure to deliver a plan for the Irish border. Eurosceptic ministers fear May's blueprint risks tying the U.K. into the EU's customs rules forever. Attorney General Geoffrey Cox is the person who will write the document, and a final view will be made by the Parliament in order to vote on whether to accept or reject it. The Irish border remains in the focus as Britain may have to continue to follow EU regulations regarding competition rules, state aid and environmental regulations. However, pro-Brexit campaigners in May's party reject these rules and favor Britain to have full control of laws in the pre mentioned regulation.

Cable dropped to session lows after the FOMC meeting yesterday and followed up with the same trend in today's European opening. However, Brexit headlines could move the pair significantly but at the same time the financial releases today could prove to be important for the pair's direction. If the pair finds fresh buying orders along its path we could see it breaking above the 1.3075 (R1) resistance line and aim for the 1.3160 (R2) resistance level. On the opposite should the pair come under the market's selling interest, we could see it breaking below the 1.3015 (S1) support line and aim for lower grounds.

In today's other economic highlights:

In the European session, we get Norway's and the Czech Republic's CPI rates for October, from the UK the GDP for Q3, Trade balance figure for September, as well as the industrial and manufacturing output growth rates also for September. In the American session we get from the US the Core PPI rates for October, the preliminary Michigan consumer sentiment for November and last week's Baker Hughes Oil rig count. As for speakers, ECB's Benoit Coeure, BoE's Andy Haldane and Fed's Williams, Harker and Quarles speak.

USD/JPY H4

Support: 113.25 (S1), 112.72 (S2), 112.15 (S3)

Resistance: 113.95 (R1), 114.55 (R2), 115.10 (R3)

GBP/USD 4H

Support: 1.3015 (S1), 1.2920 (S2), 1.2850 (S3)

Resistance: 1.3075 (R1), 1.3160 (R2), 1.3240 (R3)

EUR/USD has ticked lower in the Friday session. Currently, the pair is trading at 1.1336, down 0.24% on the day. The euro is now at its lowest level since November 1. On the release front, there are no German or eurozone events. In the U.S, PPI and Core PPI are both expected to post gains of 0.2% for October, unchanged from the September readings. As well, UoM Consumer Sentiment is forecast to slow to 98.0 points.

After the turbo-charged excitement over the U.S. mid-term elections, the Federal Reserve meeting paled in comparison. The markets were not expecting much drama, as it was not really a “live meeting” – there was virtually no chance of a rate hike, and no press conference from Fed chair Jerome Powell. Fed policymakers had trouble poking holes in the image of a booming U.S economy. The rate statement noted that job creation is solid, unemployment is down and consumer spending has been growing. The one caveat to this rosy picture was that business investment has slowed. The statement added that further “gradual increases” are expected, given that headline and core inflation are close to the Fed target of 2 percent. The Fed next convenes in mid-December, with the CME Group pegging the odds of December rate hike at a strong 76 percent.

The crisis over the Italian budget continues to fester, with no solution in sight. The EU’s Economic Commissioner, Pierre Moscovici, has demanded that Rome revise its budget, which he says increases Italy’s debt-to-GDP ration and is in breach of EU rules. Moscovici has demanded a response from Rome by November 13 and has even threatened sanctions if the Italian government does not comply. On Wednesday, Italian Prime Minister Giuseppe Conte said that he had no intention of backing down over the budget. Italy is the third largest economy in the eurozone, and the financial markets and the euro could react negatively if Rome and Brussels cannot resolve the crisis.

EUR/USD

Current level - 1.1338

The slide through 1.1390 crucial low shows, that the whole upmove since 1.1300 test is over and the intraday bias is bearish below 1.1390 resistance. A break through 1.1300 will signal, that the prolonged consolidation since August is complete and will challenge 1.1100 and 1.0860 support zones.

USD/JPY

Current level - 113.81

The upmove is still intact and a minor intraday support is seen at 113.55. A violation of the latter will challenge the crucial low at 112.90.

GBP/USD

Current level - 1.3013

The break through 1.3040 support signals, that the whole upmove since 1.2690 low is over and the outlook is bearish, for a slide towards 1.2940. Initial resistance lies at 1.3080.

UK Q3 GDP growth accelerated to 0.6% qoq, matched market expectations. That's also the fastest rate since Q4 2016.

Head of National Accounts Rob Kent-Smith noted that "The economy saw a strong summer, although longer-term economic growth remained subdued. There are some signs of weakness in September with slowing retail sales and a fall-back in domestic car purchases. However, car manufacture for export grew across the quarter, boosting factory output. Meanwhile, imports of cars dropped substantially helping to improve Britain's trade balance."

However, it should be noted that the rolling three month growth rate slowed from 0.7% in both May-Jul and Jun-Aug periods. This is in line with the above comment that there were some weakness in September. Indeed, monthly GDP growth in September was at 0.0% mom, missed expectation of 0.1% mom.

Full GDP release here.

Also released from UK

• Trade deficit narrowed to GBP -9.7B in September versus expectation of GBP -11.4B.
• Industrial production rose 0.0% mom, 0.0% yoy in September versus expectation of 0.1% mom, 0.5% yoy.
• Manufacturing production rose 0.2% mom, 0.5% yoy versus expectation of 0.1% mom 0.4% yoy.
• Construction output rose 1.7% mom in September versus expectation of 0.2% mom.

Overall, Sterling turns a bit weaker after the batch of data release.

XAUUSD (1218.88): Gold prices were seen drifting lower after the breakout below the rising trend line and the 20-period EMA. Price action could extend the declines down to the previously held lows with the potential to test the lower support at 1207.00. A retest of this support level could potentially mark an end to the downside in price action. However, if the support fails, we anticipate further declines below this level.

GBPUSD (1.3046): The British pound failed to capitalize on the gains after clearing the resistance area of 1.3132 - 1.3086. The consolidation above this level pushed the currency pair back below the resistance level. However, the 4-hour Stochastics is seen falling strongly which could signal a rebound on a hidden bullish divergence. A steeper decline following the downside breakout below the 20-period EMA could indicate further correction.

EURUSD (1.1344): The EURUSD closed on a bearish note on Thursday following the previous day's doji. Price action is expected to push lower as the falling trend line failed to hold the declines. The downside support at 1.3150 - 1.3000 is expected to be retested once again. However, there is a risk that the support level could fail. This could potentially open the way for the EURUSD to extend the declines even lower.

The U.S. dollar was seen edging higher on Thursday. On the economic front, data included the German trade balance which rose 17.6 billion. This was smaller than the forecasts of 18.2 billion.

The European Commission released its economic forecasts where it painted a grim picture. According to the report, GDP forecasts for 2018 and 2019 were lowered due to external risks such as the U.S. economy and trade wars as well as internal risks such as Italy's budget deficit.

The euro currency was seen trading on the back foot for the most part.

The Fed's meeting was the big item on the calendar. As widely expected, the central bank left interest rates unchanged at 2.0% - 2.25%. The Fed maintained its view that interest rates would be hiked once again in December.

Earlier today, China's inflation data showed that consumer prices rose 2.5% matching estimates. This was the same pace of increase compared to the previous month on an annualized basis. China’s PPI, however, continued to decline, rising just 3.3%, down from 3.6% previously.

As the week comes to an end, the markets look to a busy Friday in store. Economic data on the day will see the UK's advance GDP report for the third quarter. This is also accompanied by the monthly GDP numbers.

After faltering earlier this year, the third quarter GDP is expected to rise 0.6% on a quarterly basis. Manufacturing, industrial and construction output data are also due today.

The NY trading session will see the U.S. producer prices index data. PPI is forecast to rise 0.2% on the month. The final wholesale inventories report is also due later and is forecast to rise 0.3% on the month.

Reinforced expectations over higher interest rates in the United States after the Federal Reserve provided a consistent narrative that policymakers remain committed to “further gradual” rate hikes in the latest monetary policy statement has provided the needed catalyst to support the Dollar. The Greenback is trending higher against the majority of its counterparts in the early hours of Friday at time of writing, including all of the G10, except for the Japanese Yen remains unchanged or higher against all of the currencies in EMEA except for marginal gains in the Russian Ruble and all of the Asian basket minus the Yen and Indian Rupee.

There are no major surprises from the Federal Reserve decision to be honest, because everyone expected interest rates to be unchanged in November. But investors wanted the necessary guidance that the central bank remains committed to the same path of monetary policy that they are expecting until the end of 2019,andis what they received.

What was arguably the most interesting takeaway from the Fed statement is the lack of acknowledgement shown from the central bank regarding the recent levels of global market volatility, which suggests to investors the resilience of the Fed to maintain on course with interest rate hike ambitions.

As we move forward and digest the policy statement further, it wouldn’t be a major surprise to see the central bank divergence story returning to the attention of traders.

This is a possible reason behind the negative momentum seen in stock markets in Asia overnight, despite the initial thoughts that concerns over global growth slowing down and what a potential decline in Chinese economic momentum might possibly mean to the world economy. I would personally put the downturn in stock momentum down to concerns about higher interest rate policy in the United States, and the return of the divergence in central bank story.

Away from the aftermath of the latest FOMC statement, the British Pound is going to attract the attention of international investors as we wrap up the trading week.

The near 2% rally in the British Pound month-to-date rightfully suggests that investors are becoming confident that a Brexit agreement is close to being announced. The theme of a soon-to-be announced Brexit agreement is something that is gaining further steam across media.

I would however point out that this news is getting close to being “priced” into the Pound and potential profit-taking is a risk investor’s need to access.