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The US dollar strengthened significantly against a basket of major currencies. The US dollar index (#DX) updated monthly highs and closed in the positive zone (+0.47%). The US currency strengthened even despite the weak report on new home sales. According to the report, in August, the value of sales was revised from 629K to 585K, and in September, the value counted to 553K and turned out to be worse than the forecasted level of 627K.

The growth of the dollar contributed to the decline of the euro and the British pound. The euro continued to fall due to uncertainty about the Italian budget project. Let us recall that the EU rejected the draft proposed by Italy and gave three weeks to correct it. Also, the euro was under pressure due to the German manufacturing activity index (PMI), which counted to 52.3 in September instead of 53.5.

The British pound is under pressure, as negotiations on Brexit have not resumed. Also, British Prime Minister, Theresa May, was criticized for her Brexit strategy.

The "black gold" prices have been declining. At the moment, futures for the WTI crude oil are testing a mark of $66.30 per barrel.

Market Indicators

Yesterday, aggressive sales were observed in the US stock market: #SPY (-3.03%), #DIA (-2.40%), #QQQ (-4.58%).

The 10-year US government bonds yield continues to decline. At the moment, the indicator is at the level of 3.11-3.12%.

The news feed 25.10.2018:

German IFO business climate index at 11:00 (GMT+3:00);

ECB interest rate decision at 14:45 (GMT+3:00);

Core durable goods orders in the US at 15:30 (GMT+3:00);

Pending home sales index in the US at 17:00 (GMT+3:00).

EUR/USD

Current level - 1.1406

The break through 1.1440 confirms the bearish outlook for 1.1300, but the latter is expected to provide a reliable base for a reversal and should start a new leg on the higher frames, towards 1.1830. Trigger on the upside is 1.1550.

USD/JPY

Current level - 112.15

The reversal at 112.70 led to new low at 111.80 and my outlook is already positive, for a rise towards 112.80 hurdle, en route to 113.50. Crucial on the downside is 113.50.

GBP/USD

Current level - 1.2906

Yesterday's slide bottomed at 1.2870 and current rebound is corrective again, so there is still a risk of further depreciation, towards 1.2800 area. On the senior frames a reversal around these levels will set a finale of the prolonged consolidation below 1.3290 and will initiate a rise towards 1.3440.

The bank could choose a longer timescale over which it must reinvest maturing debt, alter the length of maturities it holds. It can change the countries in which it makes its purchase. If it decides to pivot away from any of these options, the bondholders would adversely react to this.

The unprecedented move by the European Commission, Europe's administrative body, didn't surprise the forex market yesterday because it was widely expected. The European Commission for the first time in the history asked another member state to resubmit their budget plans because it violated the block's fiscal laws. Italy has had several warnings from the EC to reduce its budget but it doesn't like to live within its means. Italy has expanded its expenditure beyond its boundaries and the populist government has refused to take austerity measures. The budget submitted to the EC proposed a deficit equal to 2.4 percent of GDP (more than double the eurozone limit). This is way too high for the EC because Italy's debt equals 131 percent of GDP.

The European Commission simply refused to accept it and now Italy will have to make changes to it. Whether the country complies, remains to be seen. This is because the new Italian government needs to deliver on its promises and for that to become a reality, it needs to put up a fight with the EC. The government has made it clear that it has no desire to step down from its main agenda. Nonetheless, the EC's rejection of Italy's budget is going to create an adverse environment for the Italian banking sector in the coming days.

Going forward, the spotlight is on the European Central Bank's monetary policy scheduled for tomorrow. What will the president of the European Central Bank, Mario Draghi, say about Italy? This is the question which many are asking. Under the current proposed budget, the country's economy will suffocate, pushing the third biggest economy of the eurozone in recession. The gravity of economic reality will likely trigger another major crisis for the eurozone. This is at stake and this is the major agenda for the president of the ECB. His views on Italy will be scrutinised by currency and bond traders.

I expect Mario Draghi to say that he doesn't see any risk of contagion due to the Italian drama and that the ECB will continue its path on monetary policy normalization. This would be a bullish message for currency traders and we could see upticks coming for the euro-dollar pair. A bullish confirmation or an upward trend confirmation would only commence if the euro-dollar pair breaks the level of 1.1630.

Having said this, the ECB's upcoming decision could impact the Italian bond market. The ECB would have to decide on its asset purchases as they become due at the end of the year. Italian bonds may have the most to lose, especially when they are the biggest beneficiaries of the ECB's decision. The bank could choose a longer timescale over which it must reinvest maturing debt, alter the length of maturities it holds. It can change the countries in which it makes its purchase. If it decides to pivot away from any of these options, the bondholders would adversely react to this. But the actual changes, if they do take place, will only be coming at the December meeting.

Remember, Draghi pushed the euro higher last year in September when he described the inflation pressure as relatively vigorous. But the Italian concerns have started to push the currency lower since then. I am expecting Draghi to stand by his inflation stance and this would support the euro. There is no doubt that the growth equation has started to disappoint due to internal and external factors but, in relative terms, the improving growth and inflation picture should be able to battle out the negative impact from political risk. Thus, I am expecting the ECB to maintain its monetary policy stance, and this would help to put a floor under the euro.

Draghi's remarks are going to bring a direct move in the Eurozone's currency. He will need to craft his speech and choose his words very carefully tomorrow. A dovish message could push the euro below 1.14 against the dollar. This is the key support area so far and the next one is near 1.12.

EURUSD bear pressure builds on psycho level at 1.1300. This is coming on the back of its Wednesday sell off. Immediate support comes in at 1.1350 where a violation will aim at the 1.1300 level. A break below here will aim at the 1.1250 level. Further down, support lies at the 1.1200. Its daily RSI is bearish and pointing lower suggesting further weakness. On the upside, resistance comes in at 1.1450 level. A break through there opening the door for more upside towards the 1.1500 level. Further up, resistance lies at the 1.1550 level where a break will expose the 1.1600 level. All in all, EURUSD continues to face further downside pressure medium term.

At this point, Gold is still struggling to take out 1235.24/1236.99 cluster resistance zone decisively after two attempts this week. For now, we'd continue to expect strong resistance around this zone to limit upside to complete the corrective rise from 1160.36. This resistance zone represents 38.2% retracement of 1365.24 to 1160.36 at 1238.62, 100% projection of 1160.36 to 1214.30 from 1183.05 at 1236.99.

On the downside, break of 1225.40 minor support will be the first sign of near term bearish reversal. Deeper fall should then be seen to 1219.90 support for confirmation.

Still, decisive break of 1235.24/1236.99 will invalidate our view. That will argue that the trend could have reversed and further rally might be seen back to 61.8% retracement at 1286.97 and above.

Here are the latest developments in global markets:

FOREX: The dollar is down by 0.21% against a basket of six major currencies on Thursday, giving back some of the gains it posted yesterday, when it capitalized on weakness in the euro. Meanwhile, the defensive yen recovered early losses on Wednesday to finish the session as the second-best performer, as the stock sell-off accelerated. The best performer was the loonie, which soared after the Bank of Canada (BoC) raised rates and appeared more hawkish, dropping some cautious language it had used previously.

STOCKS: The selloff in Wall Street accelerated markedly on Wednesday, with the S&P 500 (-3.09%) and the Dow Jones (-2.41%) both erasing all their gains for 2018, to trade modestly lower year-to-date. Meanwhile, tech underperformed, with the Nasdaq Composite plunging (-4.43%) as disappointing guidance from Advanced Micro Devices (AMD) may have heightened speculation for more poor results by other firms, dampening sentiment. The pessimism rolled over into Asia on Thursday as well, with Japan’s Nikkei 225 (-3.72%) and Topix (-3.10%) feeling most of the heat. In Hong Kong, the Hang Seng lost 1.85%, while South Korea’s Kospi 200 dropped by 1.71%. Futures tracking major European indices were a sea of red, pointing to a lower open today.

COMMODITIES: Oil pared early gains to close the session little changed, as the broad-based risk aversion weighed on energy shares, and also clouded the precious liquid’s demand outlook. Prices are also lower on Thursday, with WTI being down by 0.54% at $66.43 per barrel, while Brent lost 0.75% to trade at $75.60/barrel. In precious metals, gold is up by 0.27% today at $1236 an ounce, having met resistance near the $1240 area earlier. The yellow metal is slowly regaining its shine amid the market turmoil, advancing despite a stronger dollar yesterday, as speculators continued to unwind more of their prior net-short bets.

Major movers: Yen remains bid as stock selloff accelerates; loonie soars after BoC

Risk sentiment remained in negative territory on Wednesday, with US equity markets and most notably the Nasdaq Composite (-4.43%) bearing the brunt of the pain. The S&P 500 (-3.09%) wiped out all its gains year-to-date, and is now actually down by 0.65% in 2018. Asian markets took their cue from Wall Street and closed sharply lower, while the Japanese yen – whose haven qualities have been on full display in recent days – advanced almost across the board as investors sought shelter.

In terms of catalysts, besides the familiar themes (trade, Italy, yields), increasingly downbeat forward guidance by US firms releasing earnings likely contributed as well. The latest was chipmaker AMD (-9.17%), where executives now expect weaker revenue going forward, echoing similarly pessimistic remarks from industrial bellwether Caterpillar (-5.58%), indicating that firms across entirely different sectors are facing headwinds. Hence, softer expectations from corporates may have amplified the narrative that “peak growth” is behind us, leading investors and funds to place more emphasis on protecting any gains they have recorded already this year, as opposed to expanding them. Earnings and guidance from heavyweights including Google-parent Alphabet, Amazon, and Intel, could be crucial in shaping sentiment today.

In Canada, the BoC raised rates – as was widely expected – and appeared more confident on the outlook. Specifically, policymakers dropped a previous reference that rate hikes will be gradual, while they also brushed aside the recent slowdown in wages as being a transitory phenomenon that will dissipate soon. While they did highlight key risks, like the adjustment of highly-indebted households to higher rates and the US-China conflict, markets focused more on the upbeat signals – sending the loonie higher, though the currency later pared some of its gains on weak risk appetite.

Elsewhere, euro/dollar fell to a fresh two-month low near 1.1380, weighed down mainly by disappointing euro area PMIs for October. The soft prints may have been seen as an early hint the bloc’s weakness earlier in the year may have carried over into the final quarter. In light of the ECB meeting today as well, it likely generated some speculation for a more cautious tone by Draghi & Co.

Day ahead: ECB concludes policy meeting; US durable goods orders in focus for growth direction

The European Central Bank concludes its two-day monetary policy meeting at 1145 GMT and policymakers are expected to reiterate the already well-known story that interest rates will remain steady until the end of the 2019 summer, while the 2.5 trillion-euro quantitative easing program will stop at the end of December. Hence the focus will shift to the press conference and to the ECB chief Mario Draghi who will probably try to give an explanation about whether global risks could translate into further growth slowdown in the eurozone, something already hinted by the PMI figures. Specifically, investors would like to hear Draghi’s opinion about the Italian budget and if the central bank is planning to provide any assistance, something Draghi denied earlier, saying that the Bank is not responsible for supporting individual governments. Trade is likely to be another topic in discussion. Recall that in the previous meeting Draghi said that the outlook is “broadly balanced”. Should the ECB chief stand more cautious by changing this wording to a more dovish one, in which case he would probably mention that risks may be tilted to the downside, the euro would probably see a fresh wave of selling. Alternatively, if he remains positive expressing that growth in the eurozone will improve, the common currency could pare yesterday’s losses.

Earlier at 0800 GMT, Norway Central Bank is also expected to keep interest rates unchanged at 0.75%, while at the same time initial estimates on the German Ifo business climate index will be also closely watched.

Turning to the US, at 1230 GMT durable goods orders are projected to contract by 1.0% m/m in September after reaching an expansion of 4.4% in August, the highest in more than a year. The downfall could be a matter of higher oil prices which probably weighed on transport purchases as the core measure which excludes transportation items is anticipated to rise by 0.5% m/m from 0.0% previously. Surprisingly better results could give early signs that GDP growth figures due on Friday will probably trend up, helping the dollar to gain some strength. Pending home sales for the month of September delivered at 1400 GMT will attract significant interest as well after new home sales released on Wednesday declined sharply, bringing some headwinds to Wall Street. Initial jobless claims for the week ending October 20 will come in public at 1230 GMT.

In equities, Twitter will be among companies to report earnings before the US market open, while Google’s parent Alphabet, Amazon and Intel will issue results after US markets close.

As for today’s public appearances, Fed Vice Chairman Richard Clarida will be speaking on “Outlook for the U.S. Economy and Monetary Policy” before a Peterson Institute for International Economics luncheon, in Washington at 1615 GMT. In Canada, trade ministers will hold a two-day meeting to discuss how to reform World Trade Organisation, while the Japanese Prime Minister will be flying to China today at the invitation of Chinese Premier Li Keqiang.

Technical Analysis – USDJPY recoups losses after touching new lows; neutral to bearish in short term

USDJPY slipped to a more than a week low of 111.81 early on Thursday before reversing back above the 112 handle. The RSI in the four-hour chart crossed below its 50 neutral mark but now looks to be changing direction to meet that threshold again, a signal that the market might stretch sideways in the short-term. The MACD though seems to be strengthening to the downside below zero and its red signal line – marginally so – indicating that negative corrections are still possible. In trend signals, the recent downward move from 112.87 may remain in place as the 20-period moving average is heading south to meet the 50-period MA.

However, if US data beat forecasts today, the market could extend its rebound towards 112.53, the high on October 10 and the current top of the Ichimoku cloud. Steeper increases may retest the recent peaks between 112.73 and 112.87, while if these fail to hold too, traders could look for resistance in the 113.12-113.38 area identified by the highs on September 26 and October 9 respectively.

Otherwise, disappointing readings may push the price down to the 111.81 low before the 111.61 trough on October 15 comes into view. A decisive close beneath that bottom would resume this month’s downtrend from 114.54, turning the market from neutral to bearish again. In this case support could run towards 111.47 – a strong barrier during August. If the price manages to pierce that level too, the next stop could be around the 111.00 psychological mark

Italian Deputy Prime Minister, leader of the Five-Star Movement, Luigi Di Maio reiterates today the government will not change its 2019 budget deficit target of 2.4% despite rejection by the European Commission. He added, "in the following weeks we'll discuss our budget with the European Union and it will be possible to read out the details of our fiscal plan."

He also tried to play down recent surge in German-Italian spread, which is a serious sign of investor nervousness. Di Maio said "Markets are not concerned about Italy not respecting the EU budget rules. Investors are worried about false storytelling according to which Italy wants to leave the euro and the European Union. That is not the case."

Modest recovery from new seven-week low at 1.2867 (Wednesday's low) hit high at 1.2919 in early Thursday's trading, with bears taking a breather after UK PM May received support from her party, despite dissonant tones that were coming recently from the opposition within the party. Profit-taking after Wednesday's 0.8% fall, which also generated strong negative signals on close below pivotal supports at 1.2921 (former higher base) and 1.2904 (Fibo 61.8% of 1.2661/1.3297), is likely to precede fresh weakness, as overall picture is bearish. Rising bearish momentum and multiple bear-crosses of daily MA's in full bearish configuration support scenario. Recovery was so far unable to break above initial resistance at 1.2921, with extended upticks expected to stall under strong 1.30 resistance zone (daily cloud base/broken 55SMA/psychological barrier) to keep bearish bias. Fresh bears could stretch towards supports at 1.2811 (Fibo 76.4%) and 1.2785 (05 Sep spike low).

Res: 1.2904, 1.2921, 1.2956, 1.2980
Sup: 1.2867, 1.2811, 1.2785, 1.2729

Pivot (invalidation): 5.7460

Our preference Short positions below 5.7460 with targets at 5.6800 & 5.6500 in extension.

Alternative scenario Above 5.7460 look for further upside with 5.7750 & 5.8050 as targets.

Comment As Long as the resistance at 5.7460 is not surpassed, the risk of the break below 5.6800 remains high.

Pivot (invalidation): 0.7065

Our preference Long positions above 0.7065 with targets at 0.7090 & 0.7105 in extension.

Alternative scenario Below 0.7065 look for further downside with 0.7055 & 0.7040 as targets.

Comment The RSI calls for a bounce.