GBP/JPY extends downside move ahead of US trading, what's next?

GBP/JPY touches a low of 142.61 on the day

Price is now leaning on support from the September lows @ 142.60 after buyers failed to firmly take out the support-turned-resistance level from the 28 June low @ 143.78 over the past two trading days. It's a bit of a double whammy for GBP/JPY today with the poorer risk sentiment helping to keep yen pairs anchored while the pound isn't looking too hot either as the Brexit saga hits a bit of a pause until the new year.

The latest on that front is that Theresa May is still working to win concessions from European leaders on the backstop. What she wants is legal and binding assurances that it won't be temporary but so far European leaders are only willing to give her clarification - not legally binding - that it will be temporary; up until a trade deal supersedes it that is. They are only assuring her that the trade deal will be drawn up as "quickly" as can be, but in truth we could see the EU and UK be stuck in an 'indefinite' limbo while working that out.

As for GBP/JPY, trading today will continue to hinge on risk sentiment for the most part so keep an eye out on how US equities perform later in the day. If equities continue to sour, a break below the 142.60 level will pave the way to retest support @ 141.26 once again before further support is only seen close to the 140.00 handle.

Right now, sellers remain in control as price has been seen to struggle in reaching a break above the 100-day MA (red line). The most recent tests towards the end of November were very much a precursor for a drop as we close out the year. Now that we are here, look towards support from the lows mentioned. Those will be key in determining whether or not the downside move here has more room to run or we'll see a bounce back to retest key resistance levels again.

As we approach the year end, liquidity in the market is going to be sapped out rather quickly once the FOMC meeting next week passes. Hence, expect movement in GBP/JPY to continue to be dominated by risk sentiment for the most part but also be on the watch out for potential Brexit headlines that can skew trading sentiment - even though European and UK lawmakers are set to head out for their Christmas break soon.

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EUR/USD sinks to session lows as weak PMI readings confirm ECB concerns

EUR/USD falls to a low of 1.1309

Suddenly, the trading range between 1.1300 to 1.1400 is under threat after abysmal French prints - in which the yellow vest protests are being blamed - and continued weakness in the German prints.

If the ECB was hesitant to change its risks outlook from "broadly balanced" to "tilted to the downside" yesterday, there's more reason for them to consider doing so now after the numbers here. Yes, sure these are just survey data but the trend doesn't lie. The downwards trend in the PMI prints are well reflected in the sluggish Eurozone growth seen this year and there's no suggestions that it won't carry on until next year.

Currently, price is threatening a break of the 1.1300 handle as well as support from the 30 November low @ 1.1306. The latter has been a key support level that is helping to limit declines over the past two weeks. If that starts to give way, expect the floodgates to open as sellers will aim for the 76.4 retracement level @ 1.1276 next.

Update: Price now breaks below 1.1300 as it touches a low of 1.1298.

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AUD/USD downside break beckons as sellers continue to defend 100-day moving average

Sellers remain in control of the pair this week

Call it a timely coincidence but the negative shift in risk sentiment today couldn't come at a better time for AUD/USD sellers. Price has been knocking on the door of the 100-day MA (red line) over the past three days but ultimately, buyers appear to have encountered failure to break above that - barring any miraculous turnaround in risk sentiment later in the day.

Price is now heading back towards a test of the December low @ 0.7172 but more importantly the technical support from the 13 November low @ 0.7164. A break below the latter will see price extend a move back downwards towards 0.7100 and possibly the year's lows once again.

Right now, sellers are in control on both the daily and hourly charts, and with fundamentals also supportive of a move lower today i.e. risk-off sentiment, this could be the needed push for sellers to drive a break to the downside. Again, for that to happen watch out for the 13 November low @ 0.7164.

As for buyers, it's all about getting back above the 100-day MA @ 0.7227 in order to get a reprieve from the recent downside pressure.

The key risk event for the pair later today will be the US November retail sales data, but that aside, it's all about risk sentiment as we close out the week.

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UK PM May says grateful for significant support from colleagues

Theresa May speaks in Brussels before meeting with European leaders later

  • Says that she has heard concerns of parliament

  • Needs to get Brexit deal over the line

  • Says will be sharing political and legal assurances that we need

  • Declines to say if she might step down before next election

  • It is in the best interest for everyone to get Brexit deal over the line

  • But don't expect an immediate breakthrough

Nothing significant here from May. All the attention will be towards her meeting later in the evening to see if she can seek the needed concessions from European leaders on the backstop. GBP/USD still holds higher on the day at 1.2665 currently but failed to move above the 200-hour MA as noted earlier. EUR/GBP also sits lower on the day at 0.8982 currently.

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Heads up: ECB policy decision to come at 1245 GMT

That will be followed by Draghi's press conference at 1330 GMT

The statement is expected to confirm that we will see the end of QE this year and in that light, the central bank should follow through with a confident message. The key highlight from the statement will be to watch out any changes to the forward guidance. The central bank continues to reaffirm that rates will be left unchanged "until through the summer of 2019" and they are expected to keep with that for the time being.

There wouldn't be much else for currency traders to gather from the statement so the next focal point will be Draghi's press conference. Draghi will be highlighting the central bank's latest growth and inflation forecasts - which are expected to be downgraded - so that could is a negative impression for the euro, although I would argue that this is already very much priced in currently; still look out for algos/knee-jerk reactions.

But despite that dovish take, the key thing to watch out for will be on how Draghi assesses the risks to growth as well as the inflation outlook. Currently, the message is that risks are still "broadly balanced" but it'll be a real blow to the euro if he starts to talk about risks being "tilted to the downside".

However, if he maintains the same old message and remains confident that inflation will converge towards the central bank's target of just under 2%, that will be something for euro bulls to chew on - particularly after Italy has seemingly resolved its budget situation with the European Commission.

The yields spread between 10-year Italian and German bonds have tightened to just 263 bps as of today, and that's the narrowest since September:

With Italian debt risk being pushed to the sidelines for now, this could be the right platform for the euro to get a lift higher if Draghi decides to remain upbeat on normalising monetary policy next year.

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EUR/USD buyers look to retain near-term control ahead of ECB decision, Draghi

Price currently leans on support from the 100-hour moving average

EUR/USD was trading steadily around 1.1380 levels before the headline here briefly brought it lower to 1.1367. But price is finding some support at the lows for the day as buyers are leaning on the 100-hour MA (red line) @ 1.1371 to keep up the near-term bullish bias in the pair.

There's also additional support from the 200-hour MA (blue line) @ 1.1364 for any secondary line of defense for buyers ahead of the ECB decision and Draghi's presser later. Price should remain contained around current levels as markets await the next move by the ECB.

The downgrade in both the growth and inflation forecasts are very much expected at this juncture but the important thing to look out for here is if those downgrades start to impact the central bank's assessment for rate hike conditions or their risks outlook.

As long as the ECB and Draghi maintain that they will keep rates on hold "through the summer of 2019" and that risk are still "broadly balanced", that will be enough to keep markets satisfied and prevent any strong decline in the euro later today.

As for EUR/USD, price action remains a bit of a dull one over the past two weeks with lows reaching just above 1.1300 and highs limited by the 1.1450 level but for the most part it's been ping pong between 1.1300 and 1.1400.

Traders will be hoping for the ECB to offer something new to break this range but given that their confident message later today as they end QE will be balanced out by the downward revisions to growth and inflation outlooks, the net reaction later on may very well be neutral and the current trading range could persist ahead of the FOMC meeting next week.

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Cable moves to session highs as public support for May continues to grow

GBP/USD touches a high of 1.2585 as 158 Tory lawmakers have pledged public support for May ahead of the vote later

The pound is rising to its best levels on the day as there is growing confidence now that May will be able to win the confidence vote later today. As mentioned earlier, the magic number here is 158 votes as there are 315 Tory lawmakers and BBC reports that the public backing has reached that figure at the moment.

That is giving renewed life for the pound as it would mean that May won't be challenged for the next 12 months if the outcome turns out as what the public support shows. This will also give her much of the upper hand against lawmakers in parliament who has so far opposed her deal, and that's much needed leverage considering how her Brexit deal has hit a bit of a snag at the moment.

However, a word of caution ahead of the vote later; the voting will be done via a secret ballot, which means that all votes are anonymous. Hence, even if lawmakers have publicly voiced their support for May, they could very well vote against her later on. After all, we are dealing with politicians. So, just be mindful of that in any case.

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NZD/USD slumps to day's lows after failing to break above the 0.69 handle

NZD/USD now leans on support from the 200-day moving average

The pair posted a high of 0.6900 on the day in Asian trading as risk sentiment improved but then has been on a continued track lower since. As we began the session, the pair was trading around 0.6880 but has now fallen to lows close to the 0.6850 level on the day.

There isn't much headlines on the day on risk so far and equities sentiment is still holding up well while the aussie hasn't really fallen by much either. The kiwi's drop so far appears to be more technical-related than a fundamental one.

Price is extending to the downside, but it is not really breaking lower. Upside levels remain capped by the 0.6900 handle as well as the 50.0 retracement level @ 0.6910. That has helped to limit any gains in the kiwi seen so far this week.

Meanwhile, the downside move is also limited by support coming from the 200-day MA (blue line) which holds at 0.6851 currently. That is the area where price action is leaning against at the moment.

Looking at the near-term chart, price has now fallen back below the two key hourly moving averages and that exacerbated the decline in the kiwi earlier. But once again, the 200-day MA is proving to be a key support level for the time being in keeping buyers in the game.

So, what's next for the pair?

The focus will turn towards North American trading where we will have the US November CPI data to come. That will help shape up how risk will trade later in the day and impact the kiwi but the release will also have bearings on the dollar ahead of next week's FOMC.

For NZD/USD, an upside move relies on it breaking back above 0.6900-10 in order to retest the May high @ 0.6975. Meanwhile, a downside move relies on price falling below the 200-day MA to confirm a break of the bullish momentum seen since the start of November.

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Pound jumps around as political backdrop remains uncertain after leadership contest is triggered

GBP/USD fell to a low of 1.2478 before jumping to a high of 1.2550 and is back down again to 1.2520 levels now

Despite a leadership contest being called upon, things are far from clear at this point. David Lidington is the latest to offer his public support for Theresa May following the earlier pledges here and that is helping to breed some confidence that the contest won't be a straightforward affair that will end up with May on the losing side.

That is giving some hope for the pound that things aren't as bad as they seem but the picture is still very much muddied at this point. Do be reminded that this vote here is for the Tory party leadership and if May loses it, she will most certainly also step down as prime minister but to do so, there has to be a credible candidate willing to run in her place. As of yet, there isn't and this could result in a constitutional limbo.

And also let's not forget that this could also evolve into a parliament motion of no confidence where a general election could also be called. Aside from the above, there's also the distinct possibility of having a Brexiteer Tory prime minister in charge or even a no-deal Brexit to follow and those two outcomes are possibly the worst ones for the pound.

There's just so much potential scenarios that could pan out currently that it is making traders indecisive as to which one to latch on. Expect the pound to waffle more around current levels as the day goes by before we get more clarity on how the situation will unfold.

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US PPI coming up on the economic calendar. What to watch for

PPI a lone highlight

The North American economic calendar is light today with a lone release: November PPI.

It's due at the bottom of the hour and expected up 2.5% y/y but flat on the month. The measure excluding food and energy is forecast to rise 0.1%.

The market will be watching for any signs of inflation in trade. That could be a sign that import tariffs are driving up the cost of doing business. For a period importers may eat the extra costs but at some point they will be passed onto consumers.

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