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Canadian inflation and retail sales figures for September and August correspondingly will be hitting the markets on Friday at 1230 GMT. Barring a dramatic deviation from expectations, the data are unlikely to deter the Bank of Canada from hiking rates during its policy meeting next week. They can, however, affect the market’s perception on the steepness of the central bank’s rate path moving forward.

Inflation as gauged by the consumer price index (CPI) is projected to exhibit zero growth on a monthly basis after contracting by 0.1% in August. This would translate to an annual rate of 2.7%, slightly below August’s 2.8%. If the reading comes in line with forecasts, headline inflation would drift further away from July’s 3.0% y/y rate, which was the fastest rate of expansion since September 2011. Still, this would constitute the eighth straight month that the measure would exceed the BoC’s target for annual inflation of 2.0%, at the same time remaining within the upper bound of the 1-3% target band.

Higher energy prices were largely to 'blame' for the rise in headline CPI at current levels. Thus, the Canadian central bank may instead decide to focus on underlying price pressures when setting policy, namely on core CPI that excludes energy from its calculations. That stood at 1.7% y/y in August, matching a high last experienced in February 2017. Additionally, the three measures of core inflation monitored by the BoC – CPI median, trim and common – have proved market moving in the past and are worth monitoring. The three came in at 2.1%, 2.2% and 2.0% y/y respectively in August. In terms of projections, CPI common is expected to hold at the 2.0% y/y rate, with no polls available for the other gauges of core inflation.

Turning to retail sales, Friday’s other important release, they’re anticipated to expand by 0.3% m/m in August, the same as in the previously reported month. Meanwhile, core retail sales that exclude automobiles, are predicted to grow by 0.2% m/m, much lower than July’s 0.9% pace.

Canadian OIS put the probability for an October 24 quarter percentage point rate rise by the BoC close to 90%, in other words it is roughly seen as a done deal. The upcoming data, however significant, are unlikely to shift the central bank’s thinking away from a rate rise next week, especially in light of other releases pointing to a relatively strong economy and uncertainty over a new North American trade deal being lifted. What they may achieve though, is affect rate expectations moving forward. Particularly, markets see another interest rate increase (beyond next week’s) in March 2019. Encouraging prints may push the timing for that closer in time, and vice versa. It is worth noting that Monday’s quarterly business outlook survey by Canada’s central bank was on the optimistic side of the spectrum.

For the record, the BoC has delivered four 25bps rate increases since July 2017, with the Fed delivering twice as such moves since it began its own normalization cycle in late 2015.

In FX markets, upbeat Canadian prints are expected to lift the loonie. At the moment, immediate support to a declining USDCAD seems to be occurring around 1.3012, the current level of the 50-day moving average line. Further below, support could come from the area around 1.2950, which is the 38.2% Fibonacci retracement level of the upleg from 1.2246 to 1.3385. Lower still, the zone around 1.2880 that captures a couple of bottoms from the recent past and which was congested earlier in the year would come into scope, with steeper losses shifting the attention to the 50% Fibonacci mark at 1.2815. Conversely, disappointing figures are likely to be met with long USDCAD positions. A first line of resistance could take place around the 100-day MA at 1.3062. Not far above lies the 23.6% Fibonacci point at 1.3116, with an upside violation turning the focus to early September’s three-month high of 1.3226.

Lastly, despite oil prices and the loonie being far from perfectly correlated, on occasion their positive relationship comes to the fore; Canada is a major oil exporting power. In this sense, it is worth paying attention to crude prices as yet another factor that may determine the short-term direction in USDCAD. Inventory data, US sanctions on Iranian oil exports kicking in in early November and the US-Saudi discord over missing journalist Khashoggi are some of the themes at play in energy markets.

The US dollar strengthened significantly against a basket of major currencies after the publication of the FOMC meeting minutes. The dollar index (#DX) updated the weekly high and closed in the positive zone (+0.63%). Most Fed politicians support a further increase in interest rates. At the moment, more than 80% of financial market participants expect the Central Bank to raise the key interest rate at a meeting in December.

The British pound weakened strongly against the US currency after the publication of weak economic data in the UK. Thus, the consumer price index fell to 2.4% in September, while experts expected 2.6%. The pound is under pressure due to the uncertainty on the issue of Brexit. Meanwhile, the consumer price index in the Eurozone remained unchanged at 2.1% in September.

Today, during the Asian trading session, ambiguous data on the trade balance of Japan have been published. Australia reported that in September, the employment rate slowed down to 5.6K and was worse than the expected value of 15.2K. At the same time, the unemployment rate fell from 5.3% to 5.0%.

Oil quotes are declining amid the increase in crude oil inventories in the United States. At the moment, futures for the WTI crude oil are testing a mark of $69.60 per barrel.

Market Indicators

Major US stock indices show the variety of trends: #SPY (+0.02%), #DIA (-0.37%), #QQQ (+0.04%).

At the moment, the 10-year US government bonds yield is at the level of 3.19-3.20%.

Important economic reports on 18.10.2018:

Statistics on retail sales in the UK at 11:30 (GMT+3:00);

Philadelphia Fed manufacturing index at 15:30 (GMT+3:00).

EUR/USD

Current level - 1.1487

My outlook here is counter-trend, for a reversal and rise through 1.1550, en route to 1.1610 static resistance. The later should allow a rise further, to 1.1720 area.

USD/JPY

Current level - 112.52

The intraday bias is bullish above 112.40, for a rise towards 113.50 zone. Crucial on the downside is 112.00.

GBP/USD

Current level - 1.3085

Despite the bearish bias, I favor a reversal, for a break through 1.3155 hurdle, towards 1.3290 and 1.3440 later on.

Can the earning this season maintain it's lustre and can this actually propel the markets to their new all-time high?

European markets and U.S. futures are trading lower after the Fed debated the hike interest rate more aggressively. But before we go into further detail with that, there is something more important to discuss.

Can the earning this season maintain it's lustre and can this actually propel the markets to their new all-time high?. This is the question which traders are asking themselves because if this factor cannot help the rally, then it is arduous to lean on any other factors. As everything else is lacking energy and the only single hope is that perhaps earning season can help the U.S. to another record high.

Having said this, the FOMC minutes released last night had an important message and this may help the markets to step towards the record high. So far, there has been a lot of fear and fuss about the Fed hiking the interest rate by 25 basis points (which they have done three times this year). The minutes showed that the Fed is actually wary of the economy running too hot and hence this new idea has circulated that the Fed may actually start to raise the interest rate by 50 basis points instead of 25 basis point.

This is what we think; if the Fed increased the interest rate by 25 basis points in December, it is likely that the market actually celebrates that news rather than being pessimistic. The reason is this that the comparison now is not between no interest rate hike or 25 basis points instead it is between 25 basis points or 50 basis points. So a bad news may actually become good news.

Another interesting angle over here is the relationship between the Fed and president Trump. He has called the Fed “crazy”. Perhaps, the Fed actually decided to show the president what does the word “crazy” really mean after all.

Naturally, the trade behind the FOMC event is to go long on the dollar index and we already have seen that the dollar index has surged. But, we do believe that the bulls are in a better position and the dollar index would continue to rally.

Gold Could Be A Good Buy

The yellow metal lost a lot of strength because of the message which the FOMC minutes delivered. When the debate is that how high you can push the interest rate; it is going to leave a negative scar on the gold price in the short term. However, there are higher chances of miscalculation here hence we do think that any drop in the gold price could be an opportunity.

Bitcoin- Capitulation Going To Place

Capitulation is strongly on the cards when it comes to Bitcoin. The daily range has been so narrow for the past few days that it has stunned the crypto-fanatics. Everyone is waiting for the breakout whether that is to the downside or to the upside. Since September 21st, we have not seen any trend developing at all. This feeling is tedious and not like bitcoin at all. However, it is important to say and be on the record, that any pullback in Bitcoin could be a huge opportunity because we do think that the regulatory landscape is becoming more favourable now. I think November is going to be a very important month for cryptocurrencies.

Germany's DIHK Chambers of Industry and Commerce lowered 2018 growth forecasts significant from 2.2% to 1.8%. German economic growth is expected to slow further to 1.7% in 2019.

DIHK said "companies are noticeably more cautious about their business outlook, we see the biggest deterioration in business expectations in four years". It added "given the rapid pace of change, for example in global trade policies or digitalization - and the unclear outcome of Brexit, it is becoming more difficult for companies to foresee a clear trend in their business development,"

In the survey titled "the air is getting thinner" business expectations dropped sharply to 11, down from 17. Current situation was unchanged at 25 though.

Sterling pays little attention to weaker than expected retail sales data.

• Retail sales including auto and fuel came in at -0.8% mom, 3.0% yoy in September versus expectation of -0.4% mom, 3.6% yoy.
• Retail sales excluding auto and fuel came in at -0.8% mom, 3.2% yoy in September versus expectation of -0.4% mom, 3.8% yoy.

ONS Head of Retail Sales Rhian Murphy said: "Retail continued to grow in the three months to September with jewellery shops and online stores seeing particularly strong sales. This was despite a stark slowdown in food sales in September, following a bumper summer."

Full release here.

The US strengthened yesterday against a number of its major counterparts, as the FOMC’s last meeting minutes provided some support. The minutes confirmed expectations that the bank is going to continue to raise interest rates this year. Each and every Fed policy maker (FOMC member) backed the hike at the time and generally agreed that interest rates are to continue to rise. Analysts point out that the US Dollar is getting stronger as there is follow through support, after the release of the FOMC minutes and that USD bulls are playing to the view that the market is underpricing what the Fed can do. It should also be noted that the US benchmark 10 year treasury yield rose to 3.2% yesterday and could also contribute some support for the USD. Should the yields continue to rise, we could see the USD getting further support and USD crosses being more volatile.

EUR/USD dropped yesterday breaking clearly the 1.1577 (R2) support level and the 1.1525 (R1) support line (now both turned to resistance), aiming for the 1.1480 (S1) support barrier. The pair could continue to trade in a bears market, should the positive sentiment for the USD continue. Also the Euro summit could create headlines for the Italian budget that may weaken the common currency. Technically, it should be noted that the pair’s price action has started to form a downward trendline, incepted since the 16th of October and the RSI indicator in the 4 hour chart, approaches the reading of 30. If the market continues to favour the pair’s short positions, we could see the pair breaking the 1.1480 (S1) support line and aim for the 1.1430 (R2) support area. Should the market favour the pair’s long positions, we could see the pair breaking the 1.1525 (R1) resistance line and aim for the 1.1577 (R2) resistance zone.

Sterling loses at lower inflation and negative Brexit headlines

The pound lost some ground yesterday, as the inflation rates, came out lower than expected. However, losses were underscored from EU’s chief negotiator’s comments that more time was needed to secure an exit deal for the UK. The UK seems to be considering the proposal, as it would keep the UK in the EU longer and provide the necessary time to break the current deadlock. On other news, UK’s Brexit Secretary sparked anger among hard Brexiteers, as he implied that the UK’s parliament “meaningful vote”, will be a choice between Theresa May’s plan and a no deal. The Euro Summit along with the UK retail sales growth rate, could provide further volatility for the pound.

Cable dropped yesterday, breaking the 1.3150 (R1) support line (now turned to resistance), aiming for the 1.3080 (S1) support level. We see the case for the pair to continue to trade in a bearish market as technically the pair has started to form a downward trendline, incepted since the 16th of October. Also the release of UK’s retail sales growth rate could weaken the pound. Should the pair continue to trade in a bearish market we could see it breaking the 1.3080 (S1) support line and aim if not break the 1.3025 (S2) support level. Should the bulls take over, we could see the pair breaking the 1.3150 (R1) resistance line and aim for the 1.3215 (R2) resistance hurdle.

In today’s other economic highlights:

During the European session, we get the UK headline and core retail sales growth rates for September and in the American session, from the US the initial jobless claims figure for last week and the Philly Fed Business Index. Bear in mind, that the Euro summit could create volatility for GBP and EUR pairs. As for speakers, ECB’s Governor Mario Draghi and Benoit Coeure (will be attending the Euro Summit and some comments could be made), ECB’s Ewald Nowotny , St. Louis Fed President James Bullard and Fed’s Randal Quarles speak.

EUR/USD 4H

Support: 1.1480 (S1), 1.1430 (S2), 1.1360 (S3)

Resistance: 1.1525 (R1), 1.1577 (R2), 1.1630 (R3)

GBP/USD 4H

Support: 1.3080 (S1), 1.3025 (S2), 1.2965 (S3)

Resistance: 1.3150 (R1), 1.3215 (R2), 1.3285 (R3)

Two-day recovery from new one-month low at 111.62, boosted by reduced safe-haven demand and signals that Fed would continue to hike interest rates, faced strong resistance at pivotal 112.74 barrier (Fibo 38.2% retracement of steep 114.54/111.62 fall). Fresh bulls are pausing, with significant risk that recovery might capped here as bearish momentum continues to strengthen and freshly formed daily Tenkan-sen / Kijun-sen bear-cross, just above recovery high, weigh. Negative scenario looks for today's close in red as initial signal, with confirmation of reversal on return below 112 handle (Wednesday's low). Retest of 111.62 would signal continuation of larger downtrend and attack at next strong supports at 111.47/40 (daily cloud top / 100SMA). Conversely, break and close above 112.74 Fibo barrier, would signal recovery extension and expose barriers at 112.98 (20SMA) and 113.42 (Fibo 61.8% of 114.54/111.62 fall).

Res: 112.74, 112.98, 113.42, 113.85
Sup: 112.43, 112.00, 111.86, 111.62

UK Prime Minister Theresa May said today that she had already put forward on a proposal for avoiding a hard Irish border to the EU. Meanwhile, "a further idea that has emerged - and it is an idea at this stage - is to create an option to extend the implementation period for a matter of months - and it would only be for a matter of months." But she emphasized that "this is not expected to be used, because we are working to ensure that we have that future relationship in place by the end of December 2020."

The extension is believed to be a proposal put forward by EU's chief negotiator Michel Barnier. Under the proposal, both sides could commit to a free trade agreement by the end of 2021. That is, a year of extension in the transition period. And, only if the FTA failed to deliver so called "frictionless" trade would the Irish backstop come into action. Barnier believed that the extension would unlock the stalled debate on Irish border backstop while there would be enough time for the trade deal.

However, the idea of extending the implementation period would catch furious responses from Brexiteers. That would effectively mean another year of EU budget payments as well as continued free movements.

Pivot (invalidation): 112.35

Our preference Long positions above 112.35 with targets at 112.75 & 113.00 in extension.

Alternative scenario Below 112.35 look for further downside with 112.15 & 111.95 as targets.

Comment Even though a continuation of the consolidation cannot be ruled out, its extent should be limited.