eFXplus DATA

• Potential progress on Italy's budget tighten IT-DE spreads
• FR-DE and DE-US spreads tighten as well while the US$ trades heavy
• EUR/USD lifts above 10- & 21-DMAs, still near middle of 1.1200-1.1500 range
• Bulls tempered a bit as ECB meeting due, potential for a cautious Draghi
• ECB projections could be lowered as well, if so euro should trade heavy
• Market is very indecisive, 1.12/1.15 range might hold even after ECB & Fed

GBP/USD shorts are booking profits, boosting cable off its new 2018 low at 1.2477, ahead of this evening's Tory no-confidence vote, but the rebound may be short-lived.
Bookies nL1N1YH0SP are touting a May victory nL1N1YH0I4, and a large margin of victory is expected to boost GBP/USD. There are many obstacles on the charts for sterling.
First is 1.2659, corresponding to the daily Tenkan and Dec 4 low, then the 10-DMA at 1.2692, which has weighed on GBP/USD since mid-November.
Above the 10-DMA more significant resistance comes in at 1.2837 the 30-DMA, which has capped GBP/USD since November 15.
A move lower seems more likely, as even a victory in today's vote hardly removes substantial UK political or Brexit uncertainty.
There is still a high probability that May's Brexit deal will be voted down in parliament, which may lead to new elections, a delay in Article 50 nL8N1YH1VC or a second Brexit referendum nL3N1YG407.
Downside targets are 1.2324 -- the 23.6 percent Fib of 1.5022-1.1491, the post-Brexit high-low. Then there is 1.1983, the Jan 16 low.
IMM data GBPNETUSD= shows GBP short positions have been halved since late September provided opportunity for shorts to push GBP/USD lower still.

ING discusses USD/JPY technical outlook and maintains a tactical bearish bias against a break above 113.70.

"The daily chart shows a recovery, but as long as prices are not breaking the falling trend line above the 113.70 level we will stick to our short-term bearish view.

A test of the solid support area between the horizontal line around 111.70 and EMA-200 line at 111.63 should still be expected in the development of a bottom.

From here we should expect a rally towards the strong horizontal resistance area 114.45-115.50," ING notes. 

An unexpected drop in average weekly earnings and a flat CPI nLLACNEEGG are working in concert with a bearish intraday setup for USD/JPY that could allow bulls to buy a dip near 113.
However, upside looks limited to roughly 114, despite signs the U.S. and China are scrambling for progress on a trade deal nL1N1YG0A9 nL3N1YG1A7.
Core CPI remaining firm at 2.2 percent y/y and money markets on Monday having priced out another Fed hike beyond one next week, along with 10bp of easing in 2020, should limit downside in Treasury yields and USD/JPY, which is driven by U.S. yields due to tiny JGB yield ranges amid BOJ QQE and yield curve control.
USD/JPY's 113.52 overnight high left prices overbought and at risk of retracing 38.2 percent of this week's rebound, at 113.03, right by Tuesday's low, the 200-HMA and hourly cloud top.
Initial support is by the kijun and 21-DMA at 113.21.
With major DM stocks markets and Treasury note yields rebounding from key supports, USD/JPY probably has room to test the downtrend line across Oct-Dec high at 113.93.
Hefty net spec IMM long positioning and heavy local offers near and above 114 reinforce the downtrend line.

CIBC Research discusses its reaction to today's US CPI report for the month of November.

"Price pressures printed in line with expectations in November, with headline inflation reflecting weakness in oil prices, but core still registering a trend-like gain. Headline inflation was flat on the month, sending the annual rate down three ticks to 2.2% y/y while core inflation accelerated to 2.2% y/y as monthly price pressures advanced by 0.2%. The fall in the price of oil was also apparent in core components, including a fall in airline fares. However, shelter prices rose by 0.3%, which is a bit stronger than the advances seen in the prior two months and helped to offset the fall in airline fares.

The 2.2% core inflation figure suggests that the Fed's preffered measure of core price pressures, core PCE, should rise to be within a hair of their 2% target," CIBC notes. 

The pound was relatively stable after confirmation that UK Prime Minister Theresa May would face a vote of no confidence late Wednesday -- sterling consolidated above 1.2500 to the dollar -- but the market is looking at potential for heightened volatility after the vote.
Bearish guns are ready to fire should May fail, and GBP/USD could take a run at 1.20 nL1N1YH0CX.
However, option volatility readings are still some way off the levels seen before the Brexit referendum.
With the daily chart now hinting at scope for a decent adjustment, a May victory could see cable underpinned.
The over-riding Brexit factor will slow any sterling recovery, but a return to levels around 1.2650-1.2700 is possible.
Previous significant low from Dec 4 at 1.2659 is a viable recovery level and the 10-DMA at 1.2685 is close behind.

Those short of EUR/USD should be mindful of the growing risk of a short squeeze.
IMM data for the week ending Dec.
4 showed a futures market short an equivalent EUR/USD cash position of $7.6 billion, up from $6.9 billion the previous week.
EBS flow data since Dec.
4 shows even more euro shorts may have been established.
On Monday EUR/USD broke but failed to register a daily close above the 1.1424 Fibonacci, a 76.4 percent retrace of the recent (1.1216 to 1.1472 EBS) fall.
That sets up a classic bull trap, which has weakened the technical market structure but seen the market become even shorter.
The European Central Bank is widely expected to announce on Thursday the end of its bond buying programme Thursday.
But it is also likely to recognise slowing growth and recent poor economic data nL3N1YE0ZV.
Meanwhile, U.S. November CPI, retail sales and IP data loom nL1N1YE0CV.

Corrects fourth bullet

• No respite for the pound with new 1.2477 trend lows
• Pick up in 14-day bear momentum and stochs confirming Tues slide
• However, 14-day RSI bull divergence hints at o/s values
• Risk of a squeeze back inside the 30DMA bolli envelope, lower line 1.2520
• Favour fading Tues 1.2638 high for trend continuation
• Weeklies highlight patchy support until the 1.2365 Apr 2017 low

• EUR/USD broke but failed to register a daily close above the 1.1424 Fibo
• 1.1424 Fibo is a 76.4 percent of the 1.1216 to 1.1472 recent (EBS) fall
• This is a classic "bull trap" which has weakened the market structure
• Growing risk for losses towards/below 30-day lower BB and 2018 1.1216 low
• The 30-day lower bollinger-band is currently at 1.1262
• EUR/USD "bull trap" above key Fibo means outlook now mixed nL1N1YG0A1

• USD/JPY bulls have registered a daily close above the 113.34 Fibo = bullish
• 113.34 is a 61.8% retrace of the 114.03 to 112.23 recent (EBS) drop
• Scope for a break above 113.61 Fibo, 76.4% of the same 114.03 to 112.23 fall
• A daily close above 113.61 would unmask the 114.13/21 recent peaks
• We remain long at 112.68 for 113.60, trailing stop raised to 113.15
• USD/JPY sees biggest daily rise since Oct on Monday nL1N1YG0AG

• AUD/USD opened 0.7204 and tracked higher through the morning
• Risk assets rallied on Trump commenting that he may intervene in Huawei case
• He said he would consider doing so if it would help with a trade deal
• AUD/USD traded to 0.7230, as AXJ equity index rose above 1.0% at one stage
• Sellers at 0.7230 capped and it slipped back to 0.7215 into the afternoon
• A break above 0.7230 targets decent resistance at 0.7255/65
• The 38.2 of 0.7394/0.7170 @ 0.7255 and 10 & 21-day MAs converge at 0.7262
• Key support at 61.8 of 0.7022/0.7394 move at 0.7163

EUR/USD: Neutral (since 21 Aug 18, 1.1485): Dip below 1.1300 would not be surprising but break of 1.1265 seems unlikely.

After testing the top of our expected 1.1300/1.1440 consolidation range on Monday (high of 1.1443 on 10 Dec), EUR came close to the bottom of the range with an overnight low of 1.1302. As highlighted earlier yesterday (11 Dec, spot at 1.1330), the underlying tone has weakened and a dip below the strong 1.1300 level would not be surprising. However, lackluster momentum suggests a break of the next support at 1.1265 is unlikely. Looking forward, a clear break of 1.1265 would suggest EUR is ready to tackle the year’s low at 1.1213.

GBP/USD: Neutral (since 21 Aug 18, spot at 1.2795): GBP is under pressure but next support at 1.2400 may not come so soon.

There is not much to add to yesterday’s (11 Dec, spot at 1.2565) update. As highlighted, downward momentum has picked up strongly and GBP is still clearly under pressure. That said, the rapid decline over the past several days appears to be running ahead of itself and we do not expect the next major support at 1.2400 to come into the picture so soon. On the upside, only a move above the 1.2650 ‘key resistance’ (level was at 1.2680 yesterday) would indicate that the current downward pressure has eased.

AUD/USD: Neutral (since 13 Sep 18, spot at 0.7170): AUD is still under pressure but a break of 0.7130 would come as a surprise.

AUD traded within a relatively narrow range between 0.7185 and 0.7225 yesterday and registered an ‘inside day’. The price action offers no fresh clue and we continue to hold the view the recent sharp decline in AUD is running ahead of itself. As highlighted in recent updates, while AUD is still under pressure, a break of the major 0.7130 support would come as a surprise. All in, AUD has to reclaim the 0.7270 ‘key resistance’ (no change in level) in order to indicate that the current weak phase has stabilized.

NZD/USD: Neutral (since 07 Dec 18, 0.6880): NZD has moved into a consolidation phase.

NZD traded mostly sideways for the past few trading days and there is no much to add. The current movement is still viewed as part of a consolidation phase. The “near-term downward bias” highlighted in recent updates appears to have dissipated. In other words, NZD is expected to continue to trade sideways for now, likely between 0.6820 and 0.6930 (same range as highlighted last Friday).

USD/JPY: Neutral (since 09 Oct 18, 113.10): USD has moved into a consolidation phase.

There is not much to add to yesterday’s (11 Dec, spot at 113.20) update. As highlighted, USD has likely move into a consolidation phase and is expected to trade sideways, likely within a broad 112.40/113.90 range.

• EUR/USD hovering around 1.1330/35 after closing Tuesday at 1.1318
• Risk assets rallied in Asia on hopes of easing US/China trade tensions
• Trump said he may intervene in Huawei CFO case if it helps trade deal
• EUR/JPY moved slightly higher in news - gaining around 0.20%
• EUR/USD resistance at 1.1350/60 where 10 and 21-day MAs converge
• Support at double bottom formed around 1.1305 and trend low at 1.1267

• Equities responding positively on hopes of thaw in US/China trade tensions
• Trump comments he may intervene to in case against Huawei CFO helping risk
• This follows reports China considering cutting import tariffs on US cars
• AXJ equity index up close to 1.0% while S&P futures up 0.38%
• AUD/USD testing 0.725/30 resistance and break targets 0.7255/65
• The 38.2 0f 0.7394/0.7170 converges with 10 & 21-day MAs at 0.7255/65

As the EUR/USD tests the 200-week moving average for the eighth week in a row, mounting negatives may end up finally causing a break.
On top of more Brexit turmoil this week nL8N1YG1L6, the euro has had to contend with widening OAT/Bund spreads as French President Macron's concessions to protesters threaten to blow out the 2019 budget deficit, some estimate to 3.5 percent of GDP nL8N1YG46K.
A breach of the EU's 3.0 percent deficit target would be seized on by Italy's coalition parties as they resist making major changes to their budget in a standoff with the EU nL8N1YG3AO nR1N14501X.
While the ECB is expected to announce an end to its bond buying programme at Thursday's meeting, there's a good chance ECB President Draghi will sound dovish, following a slew of soft euro zone data.
A decisive break and Friday close below the 200 WMA, at 1.1313 per EBS, would open up a move to the 61.8 Fibo of the 2016-2018 rally at 1.1186.
Beyond that, it's hard to predict how far the euro would fall given the fickle nature of markets at present, but the break could prove significant.

• Closed +0.1%, which was enough to validate Monday's bullish outside day
• Wall street was little changed, firmer UST yields supported USD/JPY
• Data - PPI poll -0.1% m/M & 2.4% y/y & machinery orders 10.5% m/m & 5.9% y/y
• Rising cloud top and horizontal Tenkan/Kijun lines - mixed signals
• Despite bullish outside day further choppy consolidation is expected
• 113.30-45 800M strikes may act as a magnet if markets are quiet

Morgan Stanley Research discusses CHF outlook and adopts a tactical neutral bias in the near-term.

"Brexit-related uncertainty keeps us neutral on CHF for now, but we see potential for CHF underperformance in the medium term as the prospects for EMU integration look better, Italian budget risks wane and CHF receives reduced support from repatriation flows

"The EU is reportedly considering a 2-year extension for Switzerland's equivalence deal if the Swiss government agrees to a deal on future relations, potentially reducing the risk of a sudden drop in cross-border financial flows. To open room for upside, EURCHF needs to break the technical level of around 1.1390," MS argues. 

AUD/USD needs global risk sentiment to recover before a rally is possible, but its resilience so far is a promising sign if the clouds dissipate.
AUD/USD remains stable above key short-term support near 0.7165/70. Risk aversion that accompanied further flattening of the U.S. 2s-10s yield curve and the inability of DM bond yields to rally helped push AUD/USD lower after peaking on Dec 4.
Lingering U.S.-Sino trade issues, heightened tensions over the arrest of Huawei's CFO and concerns that global economic growth is slowing are also hindering AUD/USD. Those bearish risks need to abate before the pair can mount any sustainable rally.
If upbeat risk sentiment emerges, AUD/USD should test 0.7260/75 resistance where the 10- and 21-DMAs as well as the Dec 6 high sit.
A break there would open the door to December's high.
Should bearish risks escalate, the 0.7165/70 support will likely give way.
Recently established long-AUD/USD positions are then likely to be cut and the slide from December's high will resume.
Supports near 0.7075 and 0.7050 may temper bears a bit but they are unlikely to prevent a test of 2018's 0.7021 low.

Sterling will have difficulty building on today's modest rebound as PM May's options to achieve a soft Brexit dwindle nL8N1YG1L6. The mounting Brexit angst could slow growth, keeping the BoE from lifting rates.
That double whammy will weigh on GBP/USD in the near-term, putting January 2017 lows by 1.2000 in sharper focus.
The delay in parliament's Brexit vote, now slated for no later than January 21 nL8N1YG30X does little to assuage fears of the UK crashing out of the EU, keeping pressure on the pound.
EU officials have ruled out renegotiation May's Brexit deal, and PM May is facing challenges from within her party and Labour.
There is growing talk of a second referendum, which would need parliament's approval, possible only via regime change.
There is also the possibility of delaying Brexit, in hopes of renegotiating Brexit, or holding UK elections to vote a second time on Brexit.
That's a lot of uncertainty for sterling to shoulder.

Bank of America Merrill Lynch Research discusses its expectations for the ECB policy meeting on Thursday.

"We believe the European Central Bank (ECB) will end QE this week, as expected. However, Thursday's meeting will likely have a lot more issues for the ECB to address. We expect ECB President Draghi to repeat the messages of optimism that have accompanied most ECB speeches recently," BofAML projects. 

"On Thursday, we should hear "good words" conveying a willingness to pull a few triggers, but no deed apart from the formal end of QE and further information on reinvestments. We expect forecasts to be trimmed only marginally, with risks still broadly balanced. Draghi should emphasize the temporary nature of the weakness, with the evolution of wages a source of hope when it comes to inflation.

In FX, we do not expect Thursday's meeting to have a long-lasting impact on the EUR, and remain overall bullish for 2019," BofAML adds.