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On Sunday, German citizens will head to the polls to elect their new Chancellor. Unlike the bloc's recent elections, this battle appears to be more traditional in nature, as the two main parties hold very similar views on key issues. According to almost every opinion poll, another victory by incumbent Chancellor Merkel is perceived as certain. As such, we believe the market reaction on the actual vote may be relatively limited, with risks tilted towards a small relief bounce in the euro and European stocks in case Merkel wins as expected.

However, Merkel will probably need to strike a coalition with other parties, as she is unlikely to gain enough popularity to govern alone. We believe that any major market reaction in the aforementioned asset classes may result from who Merkel chooses to align herself with, something that will become clearer towards the end of October. The political alliance she forms could determine whether much-needed EU reforms will materialize, such as the creation of a position for an EU Finance Minister, a shared euro-budget, and further banking sector integration. The most market-friendly outcome may be a continuation of the current 'Grand coalition' with the SPD, Germany's second largest party, considering its pro-EU stance.

EUR/USD edged north on Thursday after it hit support at the medium-term uptrend line taken from the low of the 17th of April. At the time of writing, the rate is testing the 1.1965 (R1) level, where an upside break may open the way for another test near our next resistance of 1.2025 (R2). Our momentum studies support the case for the pair to continue trading higher for a while. The RSI rebounded and emerged back above its 50 line, while the MACD, although negative, has bottomed and just poked its nose above its trigger line. It could turn positive soon.

New Zealand election: A neck and neck battle?

On Saturday, New Zealand will hold its own General election. Most opinion polls suggest a very tight race between the incumbent National Party and the Labor Party. Judging from how the Kiwi has reacted to opinion polls so far, a victory by the Nationals would probably prove beneficial for the currency, whereas a potential Labor win could weigh on NZD. This may be the case due to the different stances these two parties hold on trade policy. The Nationals represent the status quo, and advocate continued free trade. However, Labor has stated they are open to renegotiating trade deals such as the Trans-Pacific Partnership (TPP). Considering how heavily reliant New Zealand is on international trade, such a renegotiation could hurt exporting firms and thereby, slow the economy.

NZD/USD continued trading lower yesterday, falling below the support (now turned into resistance) of 0.7340 (R1). Currently the rate is testing the 0.7280 (S1) support, where a dip may pave the way for our next obstacle of 0.7245 (S2). Nevertheless, a lot of the pair's forthcoming direction will depend on the outcome of New Zealand's General Election. If the Nationals win, the pair could rebound, break above 0.7340 (R1) and perhaps challenge once again the important territory of 0.7400 (R2). On the other hand, a Labor victory could hurt the Kiwi, and probably push the rate down towards the 0.7190 (S3) support area.

Switching to the daily chart, we see that on Wednesday, NZD/USD was rejected strongly from above the 0.7400 (R2) key obstacle and subsequently it retreated back within the longer-term wide sideways range between that barrier and the support of 0.6880. As such we will hold a neutral stance with regards to the broader outlook, unless a Nationals' victory encourages the bulls to overcome the 0.7400 (R2) critical obstacle.

Today's highlights:

During the European day, we get the preliminary manufacturing and services PMIs for September from several European nations and the Eurozone as a whole. The forecast is for most of these indices to tick down or to remain unchanged, which could weigh on the euro a little. In Canada, the headline CPI rate for August is expected to have risen, while no forecast is available for the core. We see the case for an uptick in the core rate as well, as the manufacturing PMI showed another sharp rise in selling prices. This could bring CAD under buying interest.

We have two speakers on the agenda: ECB President Mario Draghi and UK Prime Minister Theresa May. With regards to Draghi, focus may be on any hints as to whether the ECB is headed for a 'dovish tapering'. As for PM May, she will be speaking about the future EU-UK relationship and quite possibly, the Brexit divorce bill. If she offers an amount that is seen as adequate, we may see speculation that the pace of Brexit negotiations may accelerate, something that could support the pound a bit.

EUR/USD

Support: 1.1830 (S1), 1.1775 (S2), 1.1660 (S3)

Resistance: 1.1965 (R1), 1.2025 (R2), 1.2100 (R3)

NZD/USD

Support: 0.7280 (S1), 0.7245 (S2), 0.7190 (S3)

Resistance: 0.7340 (R1), 0.7400 (R2), 0.7455 (R3)

EUR/JPY - 134.29

Original strategy:

Buy at 132.40, Target: 134.40, Stop: 131.80

Position: -
Target: -
Stop: -

New strategy :

Buy at 132.40, Target: 134.40, Stop: 131.80

Position: -
Target:  -
Stop:-

As the single currency has maintained a firm undertone after recent rally, adding credence to our view that recent upmove is still in progress and bullishness remains for further gain to 134.50-60, then towards 135.00-10, however, near term overbought condition should limit upside and reckon 135.55-60 would hold from here, price should falter below 136.00-10, risk from there is seen for a retreat to take place later. 

In view of this, we are looking to reinstate long on pullback as 132.30-40 should limit downside and bring another rise. Below support at 132.27 would defer and risk test of previous resistance at 132.01 (should turn into support) but only break there would signal a temporary top is formed, bring correction to 131.40-50 first. 

Our latest preferred count is that wave (ii) is ABC-X-ABC which ended at 123.33 and wave (iii) is unfolding with wave iii ended at 100.77, followed by wave iv at 111.57 and wave v as well as the wave (iii) has ended at 97.04, followed by wave (iv) at 111.43 and wave (v) has ended at 94.12 which is also the end of the larger degree v, this also implied the major wave (C) has also ended there, hence major correction has commenced from there with (A) leg unfolding in its lower degree wave c which has possibly ended at 145.69. Under this count, A-B-C wave (B) has commenced with A leg ended at 136.23, wave B at 143.79 and wave C has possibly ended at 149.79.

Our larger degree count is that the decline from 139.26 is wave (C) and is sub-divided into a diagonal triangle i-ii-iii-iv-v with wave i - 105.44, wave ii- 123.33, wave iii - 97.03, wave iv - 111.43, followed by the final wave v as well as the end of wave (C) at 94.12, this also mark the bottom of larger degree wave B. Under this count, major rise in wave C has commenced as an impulsive wave with minor wave III ended at 145.69, wave V is still in progress for further gain to 150.00. Having said that, this so-called wave V could well be the first leg of larger degree 5-waver wave C and this wave C should bring at least a retest of wave A top at 169.97 (July 2008).

AUD/USD – 0.7964

Original strategy:

Sell at 0.8040, Target: 0.7840, Stop: 0.8100

Position: -
Target:  -
Stop:-

New strategy :

Sell at 0.8040, Target: 0.7840, Stop: 0.8100

Position: -
Target:  -
Stop:-

As aussie has rebounded after finding support at 0.7908 earlier today, suggesting consolidation above this level would be seen and corrective bounce to 0.8000 cannot be ruled out, however, reckon upside would be limited to 0.8040-50 and bring another decline later, below said support at 0.7908 would extend weakness to support at 0.8967-71, having said that, break there is needed to confirm temporary top has been formed at 0.8125 earlier this month, bring retracement of recent rise to 0.7800 first.

In view of this, we are looking to sell aussie again on recovery as 0.8040-50 should limit upside. Above said resistance at 0.8103 would abort and risk retest of 0.8125 but break of latter level is needed to confirm upmove has resumed and extend gain to 0.8150-60, then towards 0.8200 later. 

On the 4-hour chart, recent upmove from 0.7329 is unfolding as an impulsive rise with wave 3 as well as smaller degree wave (iii) extending, only minor wave v of (iii) has ended at 0.8125, hence bullishness remains for this move to extend headway to 0.8200, then towards 0.8300, however, reckon upside would be limited to 0.8400 and the final wave 5 should falter below 0.8500, bring correction probably next week.

GBPJPY is consolidating gains made after reaching a high of 152.85 yesterday, the highest level since June 2016. The chances for a push higher have diminished since the market became overbought at this level. This was indicated by the RSI rising above 70 on the 4-hour chart. Consequently, prices turned back down as upside momentum faded.

In the near term, GBPJPY is expected to see some choppy trading and will likely trade in a range below the 152.85 high, with support at 151.47, which is a resistance-turned-support level and also where the Kijun-sen line is located. Slipping below this support would turn the focus towards 150.00, a level which has been respected since September 15. A break below this support would bring more weakness to the market and open the way towards 146.80 (which was tested as both support and resistance in the past). Under this level, 143.00 comes into view ahead of 140.00.

Based on Ichimoku cloud analysis, the overall picture is bullish as the market is above the cloud while the Tenkan-sen and Kijun-sen lines are positively aligned. Other trend indicators are also bullish, as the 20 and 50-period moving averages are rising. The 152.85 high is a strong hurdle to overcome but clearing this level would see a resumption of the uptrend that started from the 140.00 area.

The risk-off sentiment reemerged on Friday in Asia, as the North Korean leader Kim Jong Un delivered another threatening message to the US following Trump's warning at his debut speech at the UN General Assembly on Monday. The dollar lost ground against a basket of major currencies, paring gains made after the Fed's decision to start unwinding its balance sheet on Wednesday. Meanwhile, the pound remained steady ahead of the widely expected speech by the British Prime Minister on Brexit later today.

Investors were in a risk-averse mode during the Asian session after the North Korean leader Kim Jong Un stated on Friday that he was considering “the highest level of hard-line countermeasure in history” against the US. A few hours later, the North Korean Foreign Minister, Ri Yong Ho, said that the regime is preparing to launch a hydrogen bomb test on an “unprecedented scale”. The North Korea's threatening message arose in response to the recent war of words by Trump who said the US would “totally destroy” the regime if it continued challenging the US or its allies.

The dollar index dropped by 0.33% on the day to 91.33, reversing more than half of gains made on Wednesday after the Fed decided to start reducing its balance sheet in October.

The safe-haven assets moved higher due to rising geopolitical tensions. Dollar/yen tumbled by 0.45% to 111.95 while dollar/swissie declined by 0.24% to 0.9684. Gold jumped by 0.45% to $1,296.61

The euro gained 0.23% against the dollar on Friday, reversing more than half of yesterday's losses. During the weekend, attention will turn on the German federal elections on Sunday, with markets eager to see if chancellor Angela Merkel will stay another four years in power. Based on voter opinion polls, Merkel's center-right Christian Democratic Union is said to lead the elections by attracting 36% of the votes. Although the first election results will be announced on Sunday, the final outcome will not come out until Tuesday. However, Reuters opinion surveys show that even if the election outcome upsets, the impact on the EU markets would be minimal as the majority of the parties are in favor of the euro project.

Today, markets will keep a close eye on speeches by ECB officials. The ECB executive member Benoit Coeure will deliver his speech first before the ECB President Mario Draghi, while the ECB Vice President Vitor Constancio will follow later on.

New Zealand will also go to the polls a day before the German elections on Saturday. Despite the National Party of Prime Minister Bill English leading the latest polls, its lead is close to 10 points making the race tight and volatile. The kiwi was trading 0.10% down at $0.7297.

The pound was in a range versus the greenback around $1.3580 and was up by 0.16% against the euro at €0.8805 ahead of the British Prime Minister's key speech on Brexit later today in the city of Florence in Italy. Theresa May is expected to give an overview of Brexit negotiations according to her deputy spokesperson, with markets anticipating that May will support a softer exit from the EU. This came after BBC sources said on Thursday that May will likely express her willingness to pay €20bn to the EU during the transition period under the agreement to have access to the bloc's single market. Note that Brexit talks are scheduled to begin their fourth round on Monday.

The loonie recovered smoothly in Asia, rising by 0.15% and driving dollar/loonie down to 1.2306. In terms of data, Statistics Canada will release inflation figures for the month of August with forecasts suggesting inflation to increase from 1.2% in July to 1.5%. Another report on monthly retail sales is projected to show no change in July's household spending.

Looking at energy prices, those were in an uptrend before the OPEC meeting kicks off in Vienna later today. Oil traders are waiting for the OPEC oil producers as well as some other producers outside the organization to discuss a potential extension of the supply cuts beyond March. WTI crude jumped by 0.28% to $50.68 per barrel and Brent increased by 0.14% to $56.51.

The pair trades in red on Friday, following Thursday's rejection on first attempt at 112.80 target (Fibo 76.4% of 114.49/107.31 fall) and fresh pressure on the greenback after North Korea's threats of another nuclear probe.

Dips were so far strongly rejected above daily cloud top (111.61) and subsequent bounce regained 112.00 handle.

Thickening daily cloud (111.61/110.43) offers strong support and renewed attempts higher could be expected while cloud top holds, with return above 200SMA (112.15) needed to generate stronger bullish signal.

However, negative signals are emerging from south-turning daily RSI which reversed on approach to o/b zone border and reversal of slow stochastic in deep overbought territory.

This may spark fresh downside and violate daily cloud top support (111.61), with extended dips to find next strong support at 111.00 zone (111.11 – converged 10/100SMA's in attempt to form bull-cross and rising daily Tenkan-sen) which guards lower breakpoint at 110.43 (daily cloud base).

Res: 112.15, 112.55, 112.80, 113.00
Sup: 111.93, 111.61, 111.11, 110.97

Cable is consolidating under 1.3600 where Thursday's recovery rally faced strong headwinds. Bounce from the floor of four-day congestion at 1.3460 zone sidelined immediate downside risk, but renewed bearish pressure could be anticipated if 1.3600 zone resists attacks.

Bearish signals from overbought daily RSI and slow stochastic reversal from overbought territory continue to warn, but clearer direction signals could be expected on sustained break out of near-term congestion between 1.3451 and 1.3655.

Today's focus is on UK PM May's speech in Italy, as May will try to rescue stalled Brexit talks if she convinces the EU that she is ready to cut a fair divorce deal.

May's speech is expected to have a strong impact on pound, as expectations of positive outcome already strongly boosted UK currency on Thursday.

Cable may receive fresh boost on euphoric reaction on May's speech and could accelerate towards next target at 1.3837 (Fibo 61.8% of 1.5016/1.1930 fall) on sustained break above recent peaks at 1.3618/55.

Theresa May's speech in Italian city of Florence is due at 13:15 GMT.

Res: 1.3595, 1.3618, 1.3655, 1.3700
Sup: 1.3553, 1.3535, 1.3523, 1.3470

The Euro extends rebound from post-Fed low at 1.1861, with fresh acceleration higher on Friday being triggered by renewed geopolitical tensions over North Korea that put the greenback under pressure and sidelined positive impact from Fed.

Bullish signal was generated on Euro's return above daily Tenkan-sen (1.1935) which now acts as support.

Near-term focus shifted higher again, as the pair is on track for full retracement of post-Fed fall from 1.2033.

Sustained break above 1.2000 barrier is required to confirm bullish scenario, with weekly close above here to generate further positive signals as the pair is on track for bullish weekly close.

Alternatively, failure to clear 1.2000 barrier would keep the downside vulnerable, but return and close below daily Tenkan-sen is needed for stronger bearish signal.

Res: 1.1900, 1.1926, 1.1967, 1.1994
Sup: 1.1963, 1.1935, 1.1900, 1.1861

In accordance with expectations, the currency exchange rate made a rebound from a combined support set up by the monthly PP at 1.1881 together with the bottom trend-line of a dominant ascending channel. The better that expected US data release together with the remarks made by Mario Draghi in Frankfurt only supported the yesterday's surge. Today the pair is expected to continue to climb to the top. First, it has no barriers on its way except for the supposed upper edge of a junior descending channel. Second, it experiences pressure from a number of moving averages as well as the weekly PP, which from resistance turned into support. Third, at 8:00 GMT the ECB President is going to speak at Trinity College, which is likely to give additional stimulus to the Euro.

Although the pair managed to break through a combination of the 55- and 100-hour SMAs yesterday, the surge was stopped a little bit below the 1.3600 mark, thus confirming an existence of a strong barrier in that area. It appears that during this whole trading week movement of the exchange rate was guided by some sort of rectangle pattern whose resistance line was located near the 1.3600 level and the support line near the 1.3475 level. On the one hand, there is a high chance that the pair will spend the rest of the day in this established formation, as it faces no significant pressure from technical indicators. On the other hand, a speech that will be delivered by PM May about post-Brexit relations with the EU is likely to have a notable impact on the value of Pound.