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Price increased and erased the morning drops. Is trading in the green and approaches the median line (ml) of the descending pitchfork. A retest followed by a minor drop will signal a breakdown below the 1.1711 horizontal support. Price increased only because the USDX has decreased today, but it could still develop a minor Head and Shoulders pattern as long as will stay within the descending pitchfork's body. Only a breakout from the descending pitchfork's body will signal a further increase.

• European equities showed modest gains today in an uneventful trading session. German markets are closed for the Day of German Unity. US stock markets opened with small gains (+0.2%).
• Eurozone producer price growth picked up significantly more than expected in August, underscoring the rebound in inflation across the currency bloc. Industrial producer prices rose 2.5% Y/Y in August, compared with 2% Y/Y in July.
• The British government has not yet cleared hurdles over its Brexit bill, Ireland and the rights of citizens, to move on to the next phase of its EU exit talks, Brussels' chief negotiator Barnier said.
• UK construction unexpectedly shrank for the first time in more than a year in September as Brexit weighed on investment in commercial building. The construction PMI fell from 51.1 to 48.1, way below 51.1 forecast. Crucially, it's also below the 50 level that divides expansion from contraction.
• Brexit poses risks to the ability of British companies to borrow from European banks and to some clearing activity which might have to relocate from London once Britain leaves the EU, the Bank of England said. Policymakers also feared that financial markets' reliance on Libor created a major risk to the UK's financial stability.
• Turkey's core inflation spiked to a 13-year high last month (11.2% Y/Y), prompting President Erdogan to blame high interest rates for fuelling price growth, reiterating an unorthodox stance that has unnerved investors. EUR/TRY rose to 4.22, matching the highest levels on record.
• Romania's central bank kept its benchmark interest rate unchanged at a record low 1.75% as expected, but altered overall policy by narrowing the gap between its deposit and lending rates. The symmetrical corridor will shrink to 1.25% from Oct. 4, from 1.50%, affecting interbank rates.
• Saudi Arabia is mulling oil and gas investments in Russia in a sign of deepening ties between the two countries. Talks are still at an early stage but framework accords could be signed this week during the Saudi king's visit to Moscow. A proposal on extending OPEC cuts could also come this week, Russian Energy Minister Novak said.

Rates

Uneventful trading session

Global core bonds traded with a downward bias until European noon. Higher EMU August PPI data can explain the Bund's underperformance. Sentiment turned for the better for core bonds as US traders entered dealings. Traded volumes in the Bund were extremely low with German markets closed for Day of the Unity and amid the uneventful eco calendar. Many investors remained also side-lined with key US eco releases in mind (US non-manufacturing ISM, ADP employment and payrolls). Today's moves had no technical implications. We remain in a sell-on-upticks environment in the Bund and especially the US Note future.

At the time of writing, the German yield curve bear steepens with yields 0.2 bps (2-yr) to 3.1 bps (30-yr) higher. Changes on the US yield curve vary between -0.4 bps (2-yr) and +1.5 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany ranged between +1 bp (Spain) and -4 bps (Portugal).

Currencies

Dollar rally stalls due to lack of 'new news'

There was hardly any (economic) news to guide USD trading today. The dollar rally took a breather after recent gains, awaiting more guidance from key eco data (including the US payrolls) later this week. EUR/USD even succeeded a cautious intraday rebound. The pair trades currently in the mid 1.17 area. USD/JPY hovers in the 113 area as major US equity indices continue to set (minor) new all-time record levels.

Overnight, Asian equities ex-Australia joined the positive sentiment from WS. The dollar stayed well bid, supported by strong equities and a minor rise in US yields. USD/JPY rebounded north of 113. EUR/USD dropped to a new correction low in the low 1.17 area. The Reserve Bank of Australia as expected left its policy rate unchanged at 1.5%. The policy statement repeated that a stronger Aussie dollar weighs on inflation, growth and employment. The Aussie dollar declined to the 0.78 area.

EUR/USD filled bids just below 1.17 at the start European dealings. So, it looked like yesterday's gradual resumption of the reflation trade would continue, resulting in higher yields, higher equities and a higher dollar. However this wasn't the case. Equities mostly traded with marginal gains and so did European yields. This time it didn't help the dollar. On the contrary. EUR/USD rebounded back higher in the 1.17 big figure. We didn't see any specific news to explain the move. If anything, interest rate differentials between the US and Germany narrowed slightly. This perhaps triggered some USD profit talking. There was also a lot of market talk about option-related activity. However, we don't make too much out of it. There was little news and trading volumes were low as German markets enjoyed a banking holiday.

There were also very few eco data in the US. Even so, the intraday USD correction halted. EUR/USD trades in the 1.1755/60 area. USD/JPY tries to stay north of the 113 big figure as US equities extend their gradual record-setting uptrend. In a broader perspective, the dollar rebound takes a breather awaiting more guidance from key eco data later this week, including the payrolls.

Sterling extends correction

Over the previous days sterling momentum clearly become less buoyant and this was also the case today. However, this time sterling in the first place lost ground against the euro. EUR/GBP rebounded further away from the key 0.8742/75 support area. Losses in cable were more modest as the dollar declined intraday. The UK September construction PMI dropped from 51. to 48.1, 1 indicating that activity in the sector contracted last month. The construction PMI is not the most important indicator for markets. However, coming on the heels of a softer manufacturing PMI yesterday, it didn't help sterling. The BoE also warned for potential disruptions in clearing activity after Brexit, but also on financing of UK corporations via from European banks. EUR/GBP trades currently in the 0.8875/80 area. Cable still set another ST correction low intraday and trades currently in the 1.3240 area. The scenario of a BoE rate is apparently (more than discounted).

USD/JPY has posted small gains in the Tuesday session. In North American trade, the pair is trading at 112.86, up 0.08% on the day. Earlier in the session, the dollar broke above the symbolic 113 level. On the release front, Japanese BoJ Core CPI accelerated to 0.6% in August. Japanese Consumer Confidence improved to 43.9, beating the estimate of 43.5 points. There are no major US releases on the schedule. On Wednesday, the US releases two key events – the ADP Nonfarm Payrolls and the ISM Nonfarm Manufacturing report. As well, Federal Reserve Chair Janet Yellen will speak at an event in St. Louis.

Low Japanese inflation levels have been a sore point in an improving economy, but there was positive news on Tuesday. BoJ Core CPI, the inflation indicator relied upon by the BoJ, accelerate to 0.6% in August, its strongest gain since May 2016. This reading follows Tokyo Core CPI, which rebounded in September with a respectable gain of 0.5%, its best gain since March 2015. Still, inflation levels remain well below the BoJ inflation target of just below 2.0%, and the BoJ has been crystal clear that it has no plans to tighten its accommodative monetary policy until inflation levels move higher.

Japanese manufacturing data has been pointing upwards, so it should come as a surprise that the Tankan Manufacturing Index, which measures confidence levels among large manufacturers, continues to accelerate in 2017. The indicator came in at 12 points in Q1, 14 points in Q2 and an impressive 22 points in Q3, its highest level since 2007. The manufacturing sector has benefited from a stronger global economy, as the demand for Japanese products remains strong. The weak Japanese currency has also helped strengthen the manufacturing and export sectors. The yen declined 1.9 percent in September, as the US dollar has gained ground against its major rivals.

President Trump's plans to reform health care have come to naught, as the proposed bill never made it past the Senate floor. Next stop is tax reform, another key campaign pledge from Trump's election campaign. The White House announced the new tax proposal, called the Unified Tax Reform Framework, which includes lowering corporate and personal income taxes. However, the plan is sketchy and short on specifics, most importantly, how will the plan be paid for? Trump has insisted that the cuts will trigger strong economic growth which will more than pay for itself. However, Moody's, the well-respected credit rating company, is not impressed by the rhetoric. On Monday, Moody's said that the tax plan is "likely credit negative", arguing that tax cuts would not be offset in spending cuts, which would result in a higher federal budget deficit and debt. The reduction in federal government revenue would negatively affect the US credit rating. Some Republican lawmakers have already come out against the plan, so it appears that the proposal will have an uphill battle to pass through the House of Representatives and the Senate.

Gold struggled to hold onto its shine on Tuesday, as the risk-on mood encouraged investors to seek riskier assets, such as equities.

The yellow metal dipped to a seven-week low below $1270 during early trading, and it looks like further punishment is in store, as firming US rate hike expectations buoy the US Dollar. With prices securing a solid monthly close below the $1300 psychological level, and extended losses towards $1267, bears are in the vicinity.

From a technical standpoint, Gold is under intense selling pressure on the daily charts, with $1267 acting as minor support. A breach below this level may instill sellers with enough inspiration to attack $1250.

Dollar Index eyes 94.00

The Greenback stood tall against a basket of major currencies during early trading on Tuesday, as positive US economic data reinforced expectations of a rate hike before year end. With the Federal Fund Futures markets pricing in more than a 75% probability of a rate hike in December, the Dollar is likely to remain supported moving forward.

Much attention will be directed towards the anticipated US Jobs Report due on Friday, which could spark some Dollar volatility. With the impact of Hurricanes Irma and Harvey adding some unplanned components into the mix, the data could be distorted.

King Dollar is making a comeback; this was displayed on Tuesday, when the Dollar Index strode towards 93.92. A breakout and daily close above the 94.00 resistance may encourage a further incline towards 94.50.

Currency spotlight - GBPUSD

Sterling extended losses against the Dollar on Tuesday, after data showed activity in the construction sector fell for the first time in 13 months, in September.

The Purchasing Manager Index (PMI) for construction dropped to 48.1 in September. The index falling below the 50 level indicates a contraction; with Brexit uncertainty and soft economic data eroding buying sentiment towards Sterling, further downside is on the cards. Technical traders will continue to observe how the GBPUSD behaves below 1.3300, sustained weakness under this level, could open a path towards 1.3150.

Daily Pivots: (S1) 1.1702; (P) 1.1758 (R1) 1.1788; More...

With 1.1832 minor resistance intact, fall from 1.2091 is expected to extend through 1.1661 support. Decline from 1.2091 is correcting whole rise from 1.0569. Deeper fall should be seen to 38.2% retracement of 1.0569 to 1.2091 at 1.1510, where we're expecting support to bring rebound. On the upside, break of 1.1832 minor support will suggest that the corrective fall is completed and turn bias back to the upside.

In the bigger picture, rise from medium term bottom at 1.0339 is not finished yet. It's expected to continue after pull back from 1.2091 completes. And, next target will be 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516. However, it should be noted that there is no confirmation of trend reversal yet. That is, such rebound from 1.0399 could be a correction. And the long term fall from 1.6039 (2008 high) could resume. Hence, we'd be cautious on strong resistance from 1.2516 to limit upside.

Daily Pivots: (S1) 0.9695; (P) 0.9725; (R1) 0.9778; More....

Despite breaking 0.9772 key resitsance, USD/CHF failed to sustain above so far. Intradaybias stays neutral first. On the upside, firm break of 0.9772 key resistance will suggest that whole down trend form 1.0342 has completed. In that case, near term outlook will be turned bullish for 0.9860/1.0099 resistance zone. However, break of 09669 minor support will suggest rejection from 09772 and turn bias back to the downside for 0.9587 support. Break will target retesting 0.9420 low.

In the bigger picture, focus remains on whether 0.9443 key support (2016 low) could be taken out firmly as down trend from 1.0342 extends. There are various interpretation of the price actions. But in any case, medium term outlook will stay bearish as long as 0.9772 resistance holds. Current down trend could extend to 38.2% retracement of 0.7065 (2011 low) to 1.0342 (2016 high) at 0.9090. However, break of 0.9772 will indicate that USD/CHF has successfully defended 0.9443 again and turn outlook bullish for 1.0099 resistance.

Daily Pivots: (S1) 112.42; (P) 112.74; (R1) 113.06; More...

USD/JPY is staying in consolidative trading in tight range below 113.25 temporary top. Intraday bias remains neutral first. As long as 111.46 minor support holds, further rise is in favor. Sustained break of medium term channel resistance will argue that correction from 118.65 is already completed with three waves down to 107.31. Break of 114.49 will confirm this bullish case and target a test on 118.65 next. On the downside, considering bearish divergence condition in 4 hour MACD, break of 111.46 will suggest rejection from the channel resistance and turn bias back to the downside.

In the bigger picture, rise from 98.97 (2016 low) is seen as the second leg of the corrective pattern from 125.85 (2015 high). It's unclear whether this this second leg has completed at 118.65 or not. But medium term outlook will be mildly bearish as long as 114.49 resistance holds. And, there is prospect of breaking 98.97 ahead. Meanwhile, break of 114.49 will bring retest of 125.85 high. But even in that case, we don't expect a break there on first attempt.

Daily Pivots: (S1) 1.3219; (P) 1.3310; (R1) 1.3366; More....

GBP/USD's fall from 1.3651 is still in progress and intraday bias remains on the downside. Current decline would extend to 61.8% retracement of 1.2773 to 1.3651 at 1.3108. On the upside, break of 1.3454 minor resistance is needed to signal completion of the decline. Otherwise, near term outlook remains mildly bearish in case of recovery.

In the bigger picture, current development argues that the long term trend in GBP/USD has reversed. That is, a key bottom was formed back in 1.1946 on bullish convergence condition in monthly MACD. Current rise from 1.1946 will target 38.2% retracement of 2.1161 (2007 high) to 1.1946 (2016 low) at 1.5466 next. In any case, medium term outlook will now stay bullish as long as 1.2773 support holds.

Euro recovers broadly today as markets are looking past the political turmoil in Spain, with focus back on ECB and economic outlook. European markets, except Spain, are steady with Germany on holiday. At the same time, thousands of people protest in Barcelona against police violence during the referendum on Catalonia independence on Sunday. The European parliament will be holding a special session on the issue tomorrow and European commission spokesman Margaritis Schinas urged that "violence can never be an instrument in politics". Elsewhere, Sterling is trading as one of the weakest one today after shockingly bad construction data. Dollar stays firm but struggles to find follow through buying.

UK PMI construction dropped to lowest since July 2016

UK PMI construction dropped sharply to 48.1 in September, down from 51.1 and missed expectation of 51.1. That's also the lowest level in more than a year since July 2016. Markit noted that "a shortfall of new work to replace completed projects has started to weigh heavily on the UK construction sector." Also, "survey respondents widely commented on a headwind from political and economic uncertainty, alongside extended lead times for budget approvals among clients". And CIPS noted that ""Respondents pointed to obstructive economic conditions and the Brexit blight of uncertainty, freezing clients into indecision over new projects".

BoE FPC minutes: Substantial risk of disruption of cross-border clearing activity

In the minutes of BoE's September 20 Financial Policy Committee meeting, the central bank noted that "there remained a substantial risk of disruption of cross-border clearing activity" after Brexit. And therefore the central bank was "was continuing to engage financial market infrastructure and firms on their contingency planning." BoE pointed out that some clearing houses are looking at contingency plans like moving activities from UK. However, in some cases, "complexity and cost of any migration was significant" and it's not an option.

RBA stands pat, few changes to statement

RBA left the cash rate unchanged at 1.50% today. The accompanying statement contained few changes from the previous one. This perhaps explains the modest drop in Aussie after the release, as the market had expected a more hawkish message. The central bank is upbeat over the economic developments, hinging on the improving non-mining investment. Policymakers also acknowledged the strength in the job market, pointing to the rise in participation rate as well as a number of forward-looking indicators. Comments on the exchange rate were limited, with the central bank reiterating the impact of a strong Aussie on inflation, GDP growth and employment. We expect the central bank to keep the policy rate unchanged until 2H18. More in RBA Upbeat On Economic Growth, No Rush To Hike Rates.

PBoC adopts targeted RRR cut

In China, PBOC announced to adopt targeted RRR cut in 2018 in some banks to 'encourage inclusive financing, such as credit support for small and micro-sized enterprises (SMEs), startups and agricultural production, as well as small business owners, impoverished groups and students. We believe the move is a fine-tuning of PBOC's other tightening measures, rather than a shift towards a loosening monetary stance. Indeed, by choosing a targeted RRR cut, instead of a broad-based cut or a rate reduction, the central bank is sending a signal that it has not changed the monetary policy stance which remains 'prudent and neutral". More in PBOC Announced Targeted RRR Cut, Just Fine-Tuning Of Monetary Policy.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.3219; (P) 1.3310; (R1) 1.3366; More....

GBP/USD's fall from 1.3651 is still in progress and intraday bias remains on the downside. Current decline would extend to 61.8% retracement of 1.2773 to 1.3651 at 1.3108. On the upside, break of 1.3454 minor resistance is needed to signal completion of the decline. Otherwise, near term outlook remains mildly bearish in case of recovery.

In the bigger picture, current development argues that the long term trend in GBP/USD has reversed. That is, a key bottom was formed back in 1.1946 on bullish convergence condition in monthly MACD. Current rise from 1.1946 will target 38.2% retracement of 2.1161 (2007 high) to 1.1946 (2016 low) at 1.5466 next. In any case, medium term outlook will now stay bullish as long as 1.2773 support holds.

Economic Indicators Update

The euro has moved towards the 1.1760 level against the U.S dollar on strong technical buying, after intraday EURUSD sellers failed close price-action below the key pairs key 200-week moving average.

Trading sentiment surrounding the EURUSD pair has also improved, after the eurozone's monthly Producer Price Inflation reading unexpectedly climbed 0.3 percent.

After spiking higher in the Asian trading, the U.S dollar index has declined close to forty points from today's high, hinting that a near-term top may be in-place in the greenback, ahead of Friday's U.S job report.

The EURUSD has also recovered above its daily pivot point, found at the 1.1748 level, and is fast approaching the key 1.1770 resistance area.

Key intraday technical support for the EURUSD is found at 1.1748, 1.1730 and 1.1710. Below the key 1.1710 level, further losses towards 1.1690 and 1.1662 are expected.

Key intraday technical resistance for the EURUSD is found at 1.1770 and 1.1800 levels. Once above the 1.1800 level, the euro's weekly pivot point offers further resistance at 1.1823, as does the pairs monthly pivot, at 1.1875.