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by Charalambos Pissouros

USD Down on Weak Retail Sales, EU Summit Takes Center Stage

The dollar slid against most of the other G10 currencies, feeling the heat of the disappointing US retail sales data for September. The data added to fears of an economic downturn due to the US-China trade conflict and thereby, increased the chances of another Fed cut at the Committee’s upcoming gathering. The pound was once again among the gainers, but trading in a rollercoaster manner due to conflicting headlines surrounding a potential Brexit deal. Today, the EU summit begins, and GBP-traders will be sitting on the edge of their seats in anticipation of whether any kind of accord could be agreed or not.

USD Slides on Disappointing Retail Sales, AUD Up on Employment Data

The dollar traded lower against most of the other G10 currencies on Wednesday and during the Asian morning Thursday. It gained only against NOK and JPY, while it was found virtually unchanged versus CAD. The main winners were AUD, GBP and CHF in that order.

USD performance G10 currencies

Yesterday, the greenback felt the heat of the US retail sales for September, which fell well short of their respective forecasts. Specifically, headline sales contracted 0.3% mom, after increasing 0.6% in August, missing estimates of another, smaller, rise of 0.3%. The core rate slid into the negative territory as well, to -0.1% mom from +0.2% mom. The forecast for the core rate was to remain unchanged.

Although we saw business confidence and investment spending feeling the heat of the US-China trade conflict, consumption has been relatively healthy, at least up until now. It seems that the negative effects of this prolonged saga continue to spread, adding to fears of an economic downturn and thereby, increasing the chances of further easing by the Fed. According to the Fed funds futures, the probability for delivering another quarter-point cut at its upcoming gathering, scheduled for the end of the month, has risen to 87% from 75% yesterday morning.

Flying from the US to Australia, the Aussie was the main gainer, coming under strong buying interest overnight, after Australia’s employment data for September showed that the unemployment rate ticked down to 5.2% from 5.3%, despite the net change in employment slowing slightly more than anticipated. The slide in the unemployment rate is certainly a move in the desired direction, but there is still a decent gap before reaching the 4.5% mark which the RBA believes it may start generating inflationary pressures. Thus, we doubt that this data set has altered much expectations around the RBA’s future course of action. Indeed, according to the ASX 30-day interbank cash rate futures yield curve, investors have just pushed slightly back the timing of when they fully price in the next 25bps decrease, from February to March.

ASX 30-day interbank cash rate futures yield curve

AUD/USD – Technical Outlook

Once again, the bulls are pushing AUD/USD above its medium-term tentative downside resistance line taken from the high of July 18th. Such a move could be painting  a slightly more positive picture. That said, for us to get comfortable with higher areas, we will wait for a push above the 0.6810 barrier first, hence why we will stay cautiously-bullish, at least for now.

As mentioned above, a break above the 0.6810 hurdle could invite more buyers into the game, as such a move would confirm a forthcoming higher high and the pair might drift to the 0.6858 zone, which marks the low of September 13th and the high of September 18th. AUD/USD could initially stall around there, but if the buyers are still feeling quite comfortable, a break of that zone could lead to a further move north, where we could aim for the 0.6895 level. That level marks the highest point of September.

On the downside, if AUD/USD falls back below the aforementioned downside line and drops below the 0.6750 hurdle, marked by the low of October 14th and yesterday’s intraday swing low, this may temporarily spook the buyers from the arena. Such a move could force the rate to slide to the support area between the 0.6710 and 0.6723 levels. Initially, that zone might hold, but if there are still no buyers in sight, the pair could end up drifting further down, possibly aiming for the 0.6677 mark, which is near the lows of August 7th and October 2nd.

AUD/USD 4-hour chart technical analysis

Pound Traders Rollercoaster Ahead of the EU Summit

The pound was not the main gainer yesterday, but managed to secure the second place, behind the Aussie. For the umpteenth time, the driver was Brexit, but the ride was not as smooth as it seems. Initially, sterling slid on headlines and reports that poured cold water on hopes over a Brexit accord. Northern Ireland’s DUP said that it is unlikely to support anything that is negotiable, while due to that, government sources said that the chances of a deal are low. Another report noted that technical negotiations have reached an impasse.

That said, everything turned around after EU Brexit negotiator Michel Barnier said that he is optimistic of getting a deal, and after UK PM Boris Johnson said to backbench MPs that although there still a cloud over the deal, they are almost there. However, he also reiterated that the UK will leave the EU on October 31st, no matter what.

All this turns the spotlight to the EU summit today and tomorrow. With the latest headlines suggesting that the two sides have resolved most of their differences, investors will be sitting on the edge of their seats to see whether this summit will eventually yield a deal. If it does, the pound is likely to extend its gains, but we will stay reluctant to trust a long-lasting trend. Still, any accord would have to be approved by the UK Parliament, perhaps at a special session on Saturday, and with the DUP not certain that it will consent, we see such a case as a hard task.

EUR/GBP – Technical Outlook

After its sharp reversal to the downside on October 10th, EUR/GBP continues to experience problems in finding a decent support level, from which the pair could bounce and at least have a slightly large recovery. Unfortunately, every time, when the rate tries to go for a large correction, it gets halted by its 21 EMA on the 4-hour chart. As long as EUR/GBP remains below the 21 EMA, we will exclude any possible large correction to the upside and continue aiming slightly lower. Also, we need to mention that the pair is trading below its short-term tentative downside resistance line drawn from the high of August 12th, which currently indicates the overall direction of the trend.

If the rate makes a move higher, but once again fails to break above its 21 EMA, this might invite the bears back into the field. The pair could then be forced to slide again, potentially drifting down to the 0.8581 hurdle, marked by the high of May 7th. If that hurdle fails to withhold the bear-pressure, its break may clear the path to the 0.8537 level, which is the low of the same day.

Alternatively, if EUR/GBP moves above the aforementioned 21 EMA, this could temporarily spook the bears from the field. That said, in order to get comfortable with a slightly larger correction, we need to wait for a push above the 0.8811 barrier, which is the high of this week. This way, we could aim for the 0.8868 obstacle, a break of which may send the rate to the 0.8938 level, marked by the inside swing low of October 9th. Around there, the pair might also test the previously-mentioned downside line, which also could provide a bit of resistance.

EUR/GBP 4-hour chart technical analysis

As for the Rest of Today’s Events

During the European day, we get the UK retail sales for September. Headline sales are expected to have rebounded 0.1% mom after sliding 0.2% in August, while core sales are forecast to have slid 0.1% after falling 0.3%. This would drive the yoy rates up to +3.2% and +2.8%, from +2.7% and +2.2% respectively. However, bearing in mind that the yoy rate of the BRC retail sales monitor for the month declined to -1.7% from -0.5%, we would consider the risks surrounding the official forecasts as titled to the downside. In any case, we expect GBP-traders to keep their gaze locked on Brexit and the EU summit.

From the US, we have building permits, housing starts, industrial and manufacturing production, all for September. Building permits and housing starts are expected to have declined 26.0% and 8.6% respectively, after rising 7.7% and 12.3%, while IP and MP are expected to have slid somewhat. Initial jobless claims for last week are also coming out and the forecast suggests a small increase to 212k from 210k.

With regards to the energy market, the EIA (Energy Information Administration) weekly report on crude oil inventories is coming out and expectations are for a 2.9mn barrels build, more or less the same as the week before.

As for tonight, during the Asian morning, Japan’s National CPIs for September are coming out. The headline rate is expected to have ticked up to +0.4% from +0.3%, while the core one is forecast to have declined to +0.3% from +0.5%. That said, bearing in mind that both the headline and core Tokyo rates for the month moved lower, we see the risks surrounding the headline National rate as tilted to the downside.

In China, GDP for Q3 is coming out, alongside the industrial production, fixed asset investment, and retail sales, all for September. The GDP is expected to have slowed to +1.5% qoq from +1.6%, something that would drive the yoy rate down to +6.1% from +6.2%. Industrial production and retail sales are forecast to have accelerated to +5.0% yoy and 7.8% yoy, from 4.4% and 7.5% respectively, while the fixed asset investment rate is anticipated to have ticked down to +5.4% yoy from +5.5%.

As for the speakers, we have four on today’s agenda: RBA Governor Philip Lowe, Chicago Fed President Charles Evans, New York Fed President John Williams, and Fed Board Governor Michelle Bowman.

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