EURUSD - With the pair continuing to weaken further on Wednesday, more decline is likely in the days ahead. On the upside, resistance comes in at 1.0550 level with a cut through here opening the door for more upside towards the 1.0600 level. Further up, resistance lies at the 1.0650 level where a break will expose the 1.0600 level. Conversely, support lies at the 1.0450 level where a violation will aim at the 1.0400 level. A break of here will aim at the 1.0350 level. Its daily RSI is bearish and pointing lower suggesting further weakness. All in all, EURUSD faces further downside pressure on declines

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How soon is now

The Fed's January FOMC minutes revealed a consensus among Fed members to raise rates, but the minutes offered up little more than studiously ambiguous double talk by suggesting a rate hike would be delivered “fairly soon”. Short-term dollar speculators were hoping the Feds would produce a more meaningful time frame, but dealers are left dangling. Just like the ever cautious Dr Yellen, awaiting clarity regarding the yet-to-be implemented Trump policies.

Euro

The European election risk has undoubtedly influenced the weakness in the Euro overnight, and to a lesser degree, the move was stretched by short-term speculators getting long USD dollar ahead of the FOMC. Dealers hoped the Feds would take this opportunity to lay their March Rate hike cards on the table, however, after touching a low of 1.0495, the EUR pivoted higher when leading centrist Emmanuel Macron agreed to an offer of an alliance from centrist Francois Bayrou. EURO investors breathed a temporary sigh of relief that this marriage would reduce Le Pen's chance of victory.

The move higher was compounded by day trade speculators exiting Euro shorts in a gradual fashion The EURO then again gapped higher as weak pre FOMC minutes shorts ran for the exits post-Fed obfuscation. However, ongoing concerns about increasing traction from far-right and anti-EU candidate Le Pen should keep the Euro well offered and with so much ambiguity in the run up to the first phase of the French election; the Euro will be severely tested in the weeks ahead. If you need any further conviction, consider Le Pen's tweets saying that the euro is “banker's money” and “not for the people.” It is hardly a positive signal to the European investment community.

Australian Dollar

With RBA's Lowe raising the bar for rate cuts, coupled with FOMC minutes double talk, the Australian dollar has bounced above .7700 as the USD dollar floundered across G-10. However, we need to keep in mind that the market has adopted a day trade mentality as positioning, positive or negative, gets quickly nipped for fear of getting caught wrong-footed in a market fraught with uncertainty. It is as if holding a position for over 3 hours is considered a long term trade in this environment.

Although the Feds were less hawkish than short term positioning was comfortable with, traders shouldn't fall into the trap of thinking the Feds are not preparing for lift off, as this morning's dollar sell-off was little more than pull back from the market's enlarged event risk view. Expect these types of position event moves to continue as dealers desperately grapple for conviction.

The AUD should remain constructive on the back of the short term carry and supportive commodity prices. However, with uncertainties in every pocket of the market abounding, global risk outlook certainly looks fragile which could impede any short-term move higher. Look for the European political risk to heighten while on the US rates front, traders will pay substantial attention to the incoming US economic data and remain vigilant and on guard for any comments from Camp Trump.

Australian CAPEX missed badly on the downside, coming in at -2.1% vs. -.05 % expected, but given the primary focus remains on external drivers, do not expect the Australian dollar to fall too sharply. However, it will certainly dampen topside momentum.

Japanese Yen

JPY/USD is all about short-term positioning and little more. The dip post FOMC minutes was little more than a reflection of short-term punters unwinding positions after rolling the dice on an under-priced March Fed Rate Hike scenario.

The two divergent drivers, Eurozone political risk and a Fed Rate Hike, will likely keep the edges of recent support and resistance intact at ¥112-115. Given the overwhelming concern about the Eurozone election risk, thoughts of impending risk aversion will continue to keep the top side USDJPY in check as EURJPY selling if very much in play which favours the downside in the absence of economic clarity from Camp Trump. However, I do not see the battle of the $ Bulls and Bears abating anytime soon, so get ready to ride that rollercoaster.

If that EUR/GBP level looks familiar, that's because it is.

Yes, we've used this EUR/GBP support level a few times now. Click that link and follow the path back in time through our EUR/GBP posts to see how each time price came back to this level, it was respected.

Mark your higher time frame levels, and you really don't have to keep changing them all that often.

EUR/GBP 4 Hourly:

So after dropping through the level briefly, you can see price has pinged back above it. This is where the pair comes back into play for us and we go back to looking for short term retests to get long.

Now zoom into the 15 minute chart and I love the way that price has respected both sides of the zone, using it as steps as it moves through it. This shows that even though the level looks like it has been simply chopped through on the higher time frame, when you zoom in, it is very technical in its movement.

EUR/GBP 15 Minute:

From here I've drawn a couple of levels to look for short term retests that you can manage your risks around. Do you see the pair as in play again, or are we pushing our luck with how many touches the level has already got?

Those hoping the minutes of the latest FOMC meeting would make up for the lack of colour in February's little-changed policy statement will have been disappointed by today's release. There was, predictably, no discussion of raising rates at the February meeting on the heels of December's rate hike. Many participants noted that a further increase in the fed funds rate would be appropriate "fairly soon" if the incoming data met or exceeded their expectations. That comes as no surprise given recent comments from Fed speakers. Some participants thought it might be appropriate to raise rates as soon as the upcoming meeting in March - seeing an opportunity to increase the Committee's flexibility to respond to any unexpected firming in economic conditions - although that view did not appear to be widespread.

The Committee's assessment of economic conditions was relatively upbeat, mirroring some of the few changes in February's policy statement. Participants noted solid domestic demand toward the end of last year, further improvement in labour market conditions and gradually rising inflation; however, those positive developments were not enough to change their economic forecasts or monetary policy outlook relative to December. It is worth noting that, since February's meeting, we have seen upside surprises in employment and inflation reports for January. Risks to the outlook were once again characterized as "roughly balanced", though participants saw the potential for fiscal stimulus as increasing upside risks to the outlook, while several saw the risk of slower economic activity as "diminished somewhat". Some thought uncertainty should not prevent the Fed from removing monetary policy accommodation in the near-term although others warned against adjusting monetary policy in anticipation of fiscal policies that might not materialize or be as effective as anticipated.

Our Take:

As with the post-meeting statement, February's minutes provide little for markets to digest in terms of forward guidance on rate hikes or reinvestment. Recent comments from Fed officials indicate that while there is no rush to shrink the balance sheet, further rate hikes in the coming months are likely. A run of positive economic data and a slightly hawkish tone from Chair Yellen last week raised the odds of a rate hike at the upcoming meeting, although markets continue to see that as less than a 50/50 prospect. Today's minutes seem consistent with that interpretation - while there was some appetite to raise rates as early as March, there is little evidence that a consensus is forming. We remain of the view that a hike is likely by mid-year but that the Committee will wait until June hoping there is more clarity on fiscal policy.

In the first meeting of 2017, the outlooks of most Federal Open Market Committee (FOMC) participants were little changed from the December round, with most members expecting a continuation of moderate expansion in economic activity and a gradual rise in inflation to target over the medium-term.

The FOMC largely judged the balance of risks to the outlook as even. Having said that, participants noted the "considerable uncertainty about the prospects for changes in fiscal and other government policies" both in terms of timing and the magnitude of the impact on the economy. While most viewed the potential for fiscal policy to have increased "upside risks," some noted "several potential changes in government policies" may result in downside risks. While many viewed the external downside risks as having diminished, several indicated that many risks still remain, particularly those associated with U.S. dollar appreciation, financial vulnerabilities in "some foreign countries," and the still low level of the fed funds rate.

Some participants remained concerned that faster-than-expected economic growth and/or undershooting of the long-term unemployment rate posed upside risks to the inflation outlook, arguing that inflation metrics have begun to tick-up at the end of 2016. This view was balanced by the doves, who argued that the appreciating dollar, and still low levels of inflation compensation and expectations posed a downside to the outlook for price growth. Moreover, patience was advised by some participants arguing that the labor market still has some healing to do given that workers continue to be pulled off the sidelines, quits rates are rising, and wage compensation is still accelerating.

Most participants expected that a "gradual" pace of rate increases was likely to be appropriate to achieve the FOMC's dual-mandate. Still, many participants opined that it may be "appropriate to raise the federal funds rate again fairly soon" as long as incoming economic information was in line or stronger than current expectations or if "risks of overshooting" the targets increased. Few participants highlighted the need to "timely" remove accommodation, "potentially at an upcoming meeting," given the risks of "overshooting," which could potentially necessitate the need to raise "more quickly than most participants currently anticipated."

Participants felt that discussions about its "reinvestment policy" should take place at upcoming meetings, with implementation and communication of any changes being top of mind.

Aside for that, much of the discussion during the first meeting of the year had to do with procedural matters, such as reaffirming and/or amending the statement on longer-run goals and monetary policy strategy. On this front, the only difference prior to last year's statement was the estimate of longer-run normal rate of unemployment, which was now thought to be lower at 4.8% (down from 4.9% during the January 2016 meeting round).

The Committee also decided to add fan charts to its Summary of Economic Projections so as to highlight the potential uncertainty related to individual participants' projections and enhance its external communications mandate. Participants also suggested a need to alter its communications as far as the "anticipated path for the policy rate" or "dots" should economic outlook change.

Key Implications

There was lots of discussion during the first meeting of 2017, with procedural matters taking up a large portion of the participant's time. On that front not much has changed, besides tweaks to communication strategy that would include fan charts and potential changes to the "dot" plots. This could be partly motivated by the FOMC becoming increasingly uncomfortable with the markets associating the "gradual" pace of rate hikes with just one or two per year. The blackout period was also extended by a few days.

The perennial discussion about how much slack remains in the economy remained top of the discussion agenda, but the hawks appeared to have the upper hand during this meeting, with more participants appearing concerned that there is more of a potential for an overshooting on the inflation target associated with faster-than-expected economic growth. Such a scenario could necessitate a faster need for rate hikes, which could pose a greater risk to the economy than starting earlier and moving more gradually.

Overall, the minutes suggest the Fed feels increasingly uncomfortable with being boxed into a path of rates that the markets have determined as "gradual" and will try to keep every meeting as "live" as possible. While we don't rule out a March or May hike, should the data continue coming in relatively constructive - particularly on the inflation metric front - our baseline scenario remains for a mid-year hike and another one later on in 2017.

Canadian retail spending was down 0.5% in December, well below consensus which called for a flat reading. The decline was even heftier, at 1% in volumes terms, as Canadians pulled back on gift buying last year.

The biggest driver in the decline in retail sales was a 9% drop in motor vehicle sales - not your typical Christmas gift, unless you are on Santa's really good list. But, even after excluding sales of vehicles, parts, and gasoline stations, spending was down a sizeable 1.4% in December - a third contraction in the last four months of 2016. The decline was fairly broad based across your typical Christmas shopping categories, led by health and personal care stores (-4.1%), clothing and clothing accessories stores (-3.7%), beer, wine and liquor stores (3.6%) and general merchandise stores (-1.3%). Sales also slumped across in the luxury-segment of jewellery, luggage and leather goods stores (-12.4%).

Key Implications

Ultimately, December's decline in retail sales is coming on the back of four months of hearty gains, and despite the pullback the consumer remained a main driving force for Canadian economic activity in the fourth quarter of 2016. Motor vehicle sales are still near record high levels, a good sign that Canadian consumers are feeling pretty optimistic about future employment and income prospects.

The December report highlights changing patterns in consumer behaviors. Canadian consumers seem to be spending more on cars and housing related items, while shying away from other discretionary spending - including luxury items.

With the economy continuing to churn out jobs, interest rates still historically low and rapid home price growth continuing to boost household wealth across parts of the country, consumers are likely to make a comeback in the early months of 2017, but the support will not be as pronounced as in prior years.

• The December decline was the first in five months and was weaker than market expectations for a flat reading.
• Lower nominal sales were despite a large increase in gasoline prices. Volume sales declined a larger 1.0% in December to partly retrace gains over the prior five months.

Sales at automobile dealers declined 2.5% in December, largely in line with an earlier-reported drop in unit vehicle sales in the month following an outsized sales pace in November (sales of motor vehicle and parts were still up 3.9% from a year ago in December). Less-expected was the extent of broadly-based weakness elsewhere. Sales at gasoline stations were the main exception; however, the 6.6% rise in spending at the pump looks to have been largely attributable to an increase in prices. Excluding the motor vehicle and gasoline station components, sales declined 1.4%, marking the third decline for that component in the last four months.

Our Take:

The pull-back in retail sales volumes in December was broadly expected given an earlier-reported drop in unit vehicle sales from record high levels in November and only partially retraced the cumulative 2.3% gain over the prior five months. Sale volumes still rose an annualized 4.5% in Q4 as a whole (and were up 3.0% on a year-over-year basis in December) which is broadly consistent with our call that overall consumer spending (including services spending not captured in the retail report) rose at a 2 1/2% rate in the quarter. In terms of overall GDP implications, the monthly pull-back in December retail volumes follows earlier reported gains in wholesale (+0.9%) and manufacturing (+2.3%) sale volumes in the month. Along with increasing indications that activity in the oil & gas sector is bottoming out (oil & gas drilling rig counts were above year-ago levels in December for the first time since December 2014), data to-date remain in line with our monitoring for a 0.2% gain in GDP in December that would build on the 0.4% rise in November and further recover from the disappointing, and surprising, 0.2% pullback in October. That remains consistent with our call for a 1.8% GDP gain in Q4 as a whole.

Wall Street is on course for a relatively flat open on Wednesday as traders look ahead to the release of the FOMC minutes from the last meeting for hints on the timing of the next rate hike.

Prior to Janet Yellen's testimony before Congress last week, investors had all but written off the possibility that we'll see a rate hike in March but the repeated insistence from the Chair and numerous other officials since that a hike is on the table, appears to have had the desired impact. That said, the odds of a rate hike are still well below the level that many see as being necessary for the Fed to actually trigger such a move - generally seen as above 70% - so there's still plenty of work to be done if the markets are going to fully buy in.

Given that the meeting was accompanied by a press conference and the number of Fed officials we've heard from since, the minutes may very well offer very little that we're not already aware of. If a hike in March is in fact is a strong possibility then we'll want to see a strong consensus indicating so in the minutes, otherwise there may be very little that they can actually add. It may therefore be Jerome Powell - a permanent voter on the FOMC - who has a greater influence on expectations when he speaks today. Should he add his name to the list of voters seriously considering a hike in March then markets should adjust accordingly, which could be bullish for the dollar - already up for a fourth consecutive day - and bearish for Gold.

Gold is trading marginally higher today but continues to show significant resilience in the face of dollar gains. Ordinarily, Gold has a relatively strong inverse relationship with the dollar and yet it's trading near more than three month highs and has not been wounded by the dollar's rally in recent days. Instead it appears to have stabilised just shy of $1,250 which is the next big barrier to the upside.

Oil is trading slightly lower on the day having threatened to break above the trading range it has been contained within for most of the year so far. Both Brent and WTI had looked on course to break through the upper end of the range at times and the latter did briefly trade at six week highs but the resistance proved too strong on this occasion.

Given that these levels are being tested even as we're seeing rising US production and oil rigs, not to mention some substantial inventory gains, suggests to me it may have legs and $59 Brent and $57 WTI may not be too far away. Clearly traders are impressed with the level of compliance in the production cuts and see this as far exceeding what's happening in the US and inventory builds as being only temporary.

USD/CAD has posted slight gains in the Wednesday session. Early in North American trade, the pair is trading slightly below the 1.32 line. On the release front, Canadian retail sales reports were softer than expected. The US will release Existing Home Sales and the Federal Reserve will publish the minutes of the January policy meeting. On Thursday, the US releases unemployment claims, with an estimate of 242 thousand.

Canadian consumers are in a surly mood and cut back in spending in December, to the surprise of the markets. Core Retail Sales declined 0.3%, compared to a forecast of +0.8%, while Retail Sales dropped 0.5%, missing the forecast of +0.1%. The week wraps up with Canadian CPI, which has posted two straight declines, as inflation levels remain weak. However, the markets are expecting a 0.3% gain in the January report. The weak numbers have further weakened the Canadian dollar, which is trading at 2-weeks lows against its US counterpart.

The Federal Reserve is back in the spotlight on Wednesday. The central bank finally pressed the rate trigger in December, a full year after the previous rate hike. Last week, Fed Chair Janet Yellen strongly hinted that that another hike is on the way, leaving the markets to speculate on the timing of a hike – will it be in March or June? Even though the US economy is solid and we could see several rate hikes in 2017, market uneasiness over the Trump administration continues to grow, dampening investor appetite for risk. Trump continues to have difficulty filling in key cabinet positions and the media continues to probe connections between Trump officials and Russia. Trump is yet to outline a clear and coherent economic policy, although he has promised to unveil a tax package in the next few weeks. After Trump's shock win in November, post-election euphoria boosted the markets. However, Trump's first month in office has been marked by controversy and confusion, which has unsettled the markets.

Dollar strengthens against European majors and Canadian Dollar today. But the greenback weakens against commodity currencies and Yen. Focus is turning to FOMC minutes. The minutes could reveal that FOMC members are more comfortable on the path of growth and inflation. But there's probably nothing new other than that. In particular, some FOMC members have openly noted that fiscal policies, due to the lack of details, were not taken into account in their decisions and projections. We'd view the March FOMC meeting, with new economic projections, as a much more important one. Released in US session, Canada retail sales dropped -0.5% mom in December. Ex-auto sales dropped -0.3% mom.

German business sentiment brightened

German Ifo business climate rose to 111.0 in February, up from 109.8, above expectation of 109.6. Expectation gauge rose to 104.0, up from 103.2, above expectation of 103.0. Current assessment gauge rose to 118.4, up from 116.9, above expectation of 116.7. The headline number matched a four-year yield. Ifo president Clemens Fuest noted in the statement that "manufacturers were far more satisfied with their current business situation." And, "after deteriorating in January, the business outlook also brightened slightly. Current demand and the number of incoming orders picked up markedly. This positive development was mainly driven by food producers, as well as mechanical and electrical engineering firms." Eurozone CPI was finalized at 1.8% yoy in January. Core CPI was finalized at 0.9% yoy. From Swiss, ZEW expectations rose to 19.4 in February.

UK Q4 GDP revised higher

UK Q4 GDP growth was revised up to 0.7% qoq, up from 0.6% qoq. Total business investments, however, dropped -1.0% qoq versus expectation of 0.0% qoq. Index of services rose 0.8% 3mo3m in December. Investors appeared to take BoE Governor Mark Carney's parliamentary testimony yesterday positively. Carney noted that there were a range of paths for the economy over the next few years. According to him, "there are scenarios where rates could rise at a faster rate than the market curve, and there are ones where they'd rise more slowly… We didn't come to an explicit view as a committee on explicit guidance that we wanted to give, so I'm not going to invent one now". BOE in its February inflation report revised higher the growth forecast to 2% in 2017, from 1.4% previously.

Released earlier today, Australia Westpac leading index rose 0.0% mom in January. Wage cost index rose 0.5% qoq in Q4 while construction work done dropped -0.2%.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0502; (P) 1.0558 (R1) 1.0591; More.....

Break of 1.0520 support confirms resumption of fall from 1.0828. Intraday bias is back on the downside for 1.0339 low. As noted before, corrective rise from 1.0339 has completed at 1.0828 already. Fall from there is likely resuming larger down trend. Break of 1.0339 low will confirm our bearish view and target parity. On the downside, break of 1.0678 is needed to confirm completion of fall from 1.0828. Otherwise, outlook will remain mildly bearish in case of recovery.

In the bigger picture, whole down trend from 1.6039 (2008 high) is in progress. Such down trend is expected to extend to 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. On the upside, break of 1.1298 resistance is needed to confirm medium term bottoming. Otherwise, outlook will stay bearish in case of rebound.

Economic Indicators Update