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Global core bonds suffer losses today with German Bunds underperforming US Treasuries following comments by ECB President Draghi. He strengthened language about building inflationary pressure compared to the ECB meeting two weeks ago by talking about a “relatively vigorous pick-up in underlying inflation”. The assessment on growth (ongoing broad-based expansion) remained unchanged. Draghi didn’t draw conclusions for monetary policy and repeated the current guidance. Up until his comments in European parliament, trading had been rather low-profile. Stronger-than-expected German Ifo business sentiment, Brent crude above $80/barrel and tonight’s start of the US Treasury’s end-of-month refinancing operation exerted some downward pressure, but moves remained limited with Wednesday’s FOMC meeting in mind. German yields add 3 bps (2-yr) to 5.2 bps (5-yr) at the time of writing with the belly of the curve underperforming the wings. The German 10-yr yield extensively tests that 0.5% resistance area. US yields add 1.7 bps (2-yr) to 2.4 bps (10-yr). 10-yr yield spread changes vs Germany hardly changed with Italy underperforming (+8 bps) ahead of Thursday’s 2019 budget proposal. The BTP rally since early September suggests that investors took a significant advance on a pro-European outcome (budget deficit around 1.6% to 2% of GDP).

Initially, there was again no single narrative to guide fx trading today. Trade uncertainty again got a bit more weight compared to the end of last week. This caused a cautious risk off bias. At the same time, safe haven bonds remained under slight downward pressure. One might assume that this might be due to investors taking a cautious approach going into the Fed on Wednesday. However, if so, it didn’t translate into a stronger dollar. EUR/USD tried a test of the 1.1725 area, but soon turned north again, supported by a better than expected Germany IFO. A second up-leg occurred as ECB’s Draghi spoke again hawkish on inflation pressures building up in EMU. Interest rate differentials narrow in favour of the euro. EUR/USD tries to regain the 1.18 big figure in a sustainably. The 1.1850 resistance (top of MT consolidation band) is within reach. USD/JPY shows a more benign trading pattern holding in the mid 112 area.

Today, there was still plenty of Brexit-noise. Last week, the EU summit revealed that the EU and the UK haven’t made much progress on Brexit. After the last week’s failure, pro-Brexit members in the UK conservative party are stepping up efforts to force PM May to give up the ‘soft’ Chequers proposal and replace it with more aggressive one. At the same time, the labour party is opening the way at least for a new people’s vote on the final Brexit deal. So, the visibility on the Brexit process and on its outcome is becoming very foggy. Today, traders shifted to some kind of wait-and-see bias awaiting the outcome of the internal debate in the government/conservative party. In technical trade, sterling regained part of Friday’s loss. However, the EUR/GBP downside was blocked by Draghi’s ‘hawkish’ comments this afternoon. EUR/GBP trades in the 0.8975 area. Cable even regained a full big figure (1.3150 area).

News Headlines

German business confidence decreases to 103.7 in September, from 103.9 in August, but beating market expectations of 103.2. The optimism from construction and retail companies withstands cautiousness from the manufacturing sector and export companies. Future expectations remain stable at 101.0, from 101.2 last month.

France’s budget deficit will increase in 2019 to 2.8% of GDP, compared to this year’s 2.6% deficit. According to Finance Minister Le Maire the increase will be temporarily and is due to slowing growth and exceptional items such as a changing tax regime. The larger deficit tightens president Macron’s room to push for European reforms.

In Sweden, Anders Norlen (Moderate Party) was elected to be the new speaker today. He will now get the first try at forming a government two weeks after the election proved to be successful for the nationalist Sweden Democrats. A vote of confidence on current Swedish Prime Minister Lofven will be held tomorrow morning.

The Euro retested 1.1800 barrier on fresh acceleration higher after hawkish remarks from ECB President Draghi. Bounce from session low at 1.1724, posted in early Europe, cracked Friday's high at 1.1802 (the highest since 14 June) sidelining risk of deeper pullback and returning near-term focus to the upside. Fresh bulls eye target at 1.1848 (14 June high) but require daily close above 1.1780 (broken Fibo 38.2% of 1.2555/1.1300 fall) for confirmation of bullish signal. Completion of asymmetric inverse Head and Shoulders pattern on daily chart adds to positive signals, as growing bullish momentum underpins the action. Violation of 1.1848 target could open way for extension towards 1.1928 (50% of 1.2555/1.1300) and bring psychological 1.20 barrier in focus (1.1996 is 14 May high). Dip-buying above rising 5SMA (1.1734) remains favored near-term scenario.

Res: 1.1848; 1.1900; 1.1928; 1.1996
Sup: 1.1780; 1.1750; 1.1734; 1.1689

Daily Pivots: (S1) 1.6097; (P) 1.6137; (R1) 1.6159; More....

EUR/AUD's rebound from 1.6051 resumes by taking out 1.6175 minor resistance. Intraday bias is back on the upside for 1.6353 high. The correction from 1.6353 has likely completed at 1.6051 already. And larger medium up trend might be resuming. Break of 1.6353 will confirm tis bullish case and target 1.6587 key resistance next.

In the bigger picture, up trend from 1.3624 (2017 low) is still in progress. Further rise should be seen to retest 1.6587 (2015 high). Decisive break there will resume the long term rally and target 1.7488 fibonacci level. On the downside, break of 1.5886 resistance turned support is need to be the first sign of medium term reversal. Otherwise, outlook will remain bullish in case of deep pull back.

Daily Pivots: (S1) 1.1721; (P) 1.1762; (R1) 1.1792; More.....

EUR/USD's really resumes after brief consolidation and breaks 1.1802 to as high as 1.1814 so far. Intraday bias is back on the upside. Sustained trading above 38.2% retracement of 1.2555 to 1.1300 at 1.1779 will pave the way to 100% projection of 1.1300 to 1.1733 from 1.1525 at 1.1958. On the downside, though, break of 1.1723 minor support will turn bias back to the downside for 1.1525 support instead.

In the bigger picture, a medium term bottom should be in place at 1.1300, on bullish convergence condition in daily MACD and some consolidations would be seen. But still, note that EUR/USD was rejected by 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516. That carries some long term bearish implications. Thus, we'd expect fall from 1.2555 high to resume after consolidation completes. Below 1.1300 should send EUR/USD through 61.8% retracement of 1.0339 to 1.2555 at 1.1186. And, in that case, EUR/USD would head to retest 1.0339 (2017 low).

Euro surges as ECB President Mario Draghi sounds rather upbeat in his European Parliament ECON committee hearing. On growth he noted "an ongoing broad-based expansion of the euro area economy", with "high levels of capacity utilisation". Also, "labour markets are tightening with signs of labour shortages in some countries and sectors" And "higher income supports private consumption".

More important, Draghi noted "domestic price pressures are strengthening and broadening". And, "underlying inflation is expected to increase further over the coming months as the tightening labour market is pushing up wage growth."

Overall guidance on monetary policy is unchanged though. That is, subject today, ECB will end the asset purchase program after December. And interest rates will stay at current level "through the summer of 2019". Draghi said the guidance firstly incorporated a "calendar-based element" which tells the market when the first hike could come. Secondly, there is a "state-dependent component" indicating that rate could still stay unchanged if necessary, and for as long as needed.

Full introductory statement in the hearing here.

Daily Pivots: (S1) 0.9551; (P) 0.9575; (R1) 0.9609; More...

Intraday bias in USD/CHF remains neutral for consolidation above 0.9541 temporary low. In case of another fall, we'd look for bottoming sign at 0.9523 fibonacci level to bring rebound. On the upside, break of 0.9651 support turned resistance will indicate short term bottoming and target 0.9757 resistance. However, sustained break of 0.9523 would pave the way to retest 0.9186 low.

In the bigger picture, rise from 0.9186 low has completed at 1.0067, after failing to sustain above 1.0037 resistance. Fall from 1.0067 could extend to 61.8% retracement of 0.9816 to 1.0067 at 0.9523 and possibly below. But for now, we don't expect a break of 0.9186 low. On the upside, firm break of 0.9866 support turned resistance will suggests that fall from 1.0067 has completed and rise from 0.9186 is resuming.

Daily Pivots: (S1) 112.36; (P) 112.62; (R1) 112.80; More...

Intraday bias in USD/JPY remains neutral for consolidation below 112.86 temporary top. Near term outlook will remain cautiously bullish as long as 111.82 resistance turned support holds. On the upside, above 112.86 will target 113.17 resistance. Decisive break there will resume whole rally from 104.62 and target 114.73 resistance next.

In the bigger picture, corrective fall from 118.65 (2016 high) should have completed with three waves down to 104.62. Decisive break of 114.73 resistance will likely resume whole rally from 98.97 (2016 low) to 100% projection of 98.97 to 118.65 from 104.62 at 124.30, which is reasonably close to 125.85 (2015 high). This will stay as the preferred case as long as 109.36 support holds. However, decisive break of 109.36 will mix up the outlook again. And deeper fall should be seen back to 61.8% retracement of 104.62 to 113.17 at 107.88 and below.

“Bear” pound speculators hold nearly the same amount of net short positions in sterling as they did in July 2016.

This would suggest that the markets worries about how the Brexit divorce on March 29, 2019 will look, and the uncertainty surrounding it, has got back to levels it was at just after the referendum vote.

According to CFTC latest data, sterling shorts have increased by +18K to +79K in the week to Sept. 18 – this is the highest level of “short” positions in four-months.

Pound bid

The pound trades higher this morning, both against the dollar and the euro, reversing some of the losses it made on Friday after E.U leaders rejected U.K PM Theresa May’s Brexit deal proposal and May reiterating in a speech that a no-deal scenario was better than a bad deal.

GBP/USD (£1.3152) remains handcuffed to Brexit rhetoric and PM May woes and has reclaimed the psychological £1.31 handle after comments this morning from U.K Brexit Minister Raab indicated that he is confident he will make progress on Brexit.

There are also whispers that PM May has started contingency planning for possible snap election in November – however, Raab reiterated that “no election is planned.”

Daily Pivots: (S1) 1.2999; (P) 1.3138; (R1) 1.3221; More...

Intraday bias in GBP/USD is turned neutral first with today's strong recovery. But still, risks stay on the downside as long as 1.3297 resistance holds. The corrective rise from 1.2661 could have completed at 1.3297, ahead of 1.3316 key fibonacci level. On the downside, break of 1.3042 resistance turned support will bring deeper fall to 1.2784. Break there will argue that larger down trend from 1.4376 is resuming for a new low below 1.2661.

In the bigger picture, whole medium term rebound from 1.1946 (2016 low) should have completed at 1.4376 already, after rejection from 55 month EMA (now at 1.4062). The structure and momentum of the fall from 1.4376 argues that it's resuming long term down trend. And this will be the preferred case as long as 38.2% retracement of 1.4376 to 1.2661 at 1.3316 holds. However, firm break of 1.3316 would bring stronger rebound to 61.8% retracement at 1.3721. And, the eventual depth of the fall from 1.4376, and the chance of hitting 1.1946 low, will depend on the strength of the interim corrective rebound from 1.2661.

Sterling pares back some of last week's loss and is trading as the strongest one for today so far. There were lot of comments on Brexit from both sides. In particular, UK Brexit Minister Dominic Raab tried to talk down the disagreement from EU. But the messages from the EU seemed to be rather consistent so far as they're not going to drop their demand. We'll know more on UK's side after Prime Minister Theresa May's cabinet meeting today. In the mean time, Euro follows as the second strongest for the day, Dollar the third. Australian and New Zealand Dollar are the weakest ones as China is clear they won't back down from trade war with the US.

Quick update: Euro surges sharply as ECB Draghi said domestic price pressures are strengthening and broadening. More here.

In other markets, European stocks trade generally lower today. FTSE is down -0.22% at the time of writing, DAX down -0.31%, CAC down -0.19%. Germany 10 year bund yield breached 0.48 earlier but is back at 0.468. China and Japan are on holiday. Hong Kong HSI closed down -1.62%, Singapore Strait Times closed up 0.05%.

Technically, Dollar did try to strength earlier today but there is no follow through buying. Focus remains on whether it could reversal after hitting key fibonacci level at Euro at 1.1779. Risks stay on the downside for Sterling despite today's recovery. We'd still more likely seen GBP/USD breaks through 1.3042 support ahead.

UK Raab: Stubborn tone of EU just blips blown a little out of proportion

UK Brexit Minister Dominic Rob said today "we keep on negotiating in good faith, we try and get the best deal we can, but we are ready for all eventualities." He also urged not to overreact to the "stubborn" tone of the EU. He emphasized "these blips in the world, they're blown a little bit out of proportion, but we double down, we don't throw our toys out the pram, hold our nerve, keep our cool."

However, Rob also pointed out "at the same we need to be ready for the possibility … that the ambitions that we are bringing to these negotiations to try and get a win-win deal isn't matched by the other side and it does take two to tango."

He added "what they need to see is some unity of purpose from the UK which is why all this Labour nonsense about a second referendum is not only undemocratic but it's the last thing we should be doing right now with our EU partners because it encourages them to offer us a lousy deal which makes a no deal more likely."  Raab also said "the vast majority, the silent majority in this country just want us to get on with it and that's what we're doing."

More comments on Brexit as PM May's cabinet meets

German European affairs minister Michael Roth said Brexit deal is still possible by November. And he also warned that a no-deal Brexit would be the worst case scenario for all parties. However, Roth also emphasized that "we will not undo the single market or create special rules which could result in competitive disadvantages for our companies." Also, he added that Germany fully support chief negotiator Michel Barnier. There is no softening on Germany's stance indeed.

Separately, French President Emmanuel Macron's office also said he expected the UK to put forward new proposals in October. And he preferred not to drag on. His office said that "It's a way of raising pressure, … It's not necessarily 'take it or leave it', it's really to say there's a lot of work to be done by November, we must do it, and not let this thing drag on."

UK Prime Minister Theresa May's spokesman said the cabinet is due to discuss Brexit negotiations today. And he emphasized "the cabinet gave its full support to the white paper (Chequers plan), and that continues to be the case."

However, Jacob Rees-Mogg, chairman of the European Research Group of anti-EU lawmakers in May's ruling Conservative party, said "the prime minister is a lady of singular wisdom and therefore is likely to recognize the reality that Chequers does not have much support either in this country or abroad."

German Ifo dropped to 103.7, economy remains robust

German Ifo Business Climate Index dropped -0.1 to 103.7 in September but beat expectation of 103.2. Business Expectations index dropped -0.2 to 101.0, above consensus of 100.5. But Current Assessment Index was unchanged at 106.4, above expectation of 106.0.

Ifo President Clemens Fuest noted in the release "firms' assessments of their current business situation deteriorated marginally, but remain at a high level. Companies also scaled back their business expectations somewhat. Despite growing uncertainty, the German economy remains robust."

China released 36k-word white paper showing it's not backing down on trade war with US

China's State Council release a "White Paper on China-US Economic and Trade Frictions and China's Position" today. This 36000 words paper consists of six sections, detailing the benefits of the bilateral trade, the economic and trade relations, US protectionism and trade hegemonism, the threat of US practice to world economy and China's own position. It doesn't matter how much truth the white paper tells, as what China says is always doubtful. Most important thing is that China is not going to back down from trade war with the US.

In particular, the paper condemns the under the "America First" bandwagon, the new US government "abandoned the basic norms of international exchanges such as mutual respect and equal consultation, and implemented unilateralism, protectionism and economic hegemonism."And the US used different means to "carry out economic intimidation, and impose extreme pressure its own interests impose its own interests on China." The paper also detailed the new protectionist measures of the US. These include measures that discriminate products of other countries, abused national security investigations, subsidies on local industries.

China's own position include defending the "dignity and core interests of the country", "promote healthy trade relationship with the US", "promote and improve multilateral trade system", "protect property and intellectual property rights", "protect rights of foreign businesses in China", "continue deepening reforms on opening the markets", work on win-win relationships with developed and developing countries", etc.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2999; (P) 1.3138; (R1) 1.3221; More...

Intraday bias in GBP/USD is turned neutral first with today's strong recovery. But still, risks stay on the downside as long as 1.3297 resistance holds. The corrective rise from 1.2661 could have completed at 1.3297, ahead of 1.3316 key fibonacci level. On the downside, break of 1.3042 resistance turned support will bring deeper fall to 1.2784. Break there will argue that larger down trend from 1.4376 is resuming for a new low below 1.2661.

In the bigger picture, whole medium term rebound from 1.1946 (2016 low) should have completed at 1.4376 already, after rejection from 55 month EMA (now at 1.4062). The structure and momentum of the fall from 1.4376 argues that it's resuming long term down trend. And this will be the preferred case as long as 38.2% retracement of 1.4376 to 1.2661 at 1.3316 holds. However, firm break of 1.3316 would bring stronger rebound to 61.8% retracement at 1.3721. And, the eventual depth of the fall from 1.4376, and the chance of hitting 1.1946 low, will depend on the strength of the interim corrective rebound from 1.2661.

Economic Indicators Update