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The news that the EU and Italy reached an agreement over the budget lifted investment sentiment in Italy and around the eurozone yesterday. 

The coalition government in Rome was originally pushing for a budget deficit of 2.4%, and now both sides have agreed upon a deficit of 2.04%. The tense standoff between Rome and Brussels has come to an end, and traders are relieved as there was a fear that another round of the eurozone debt crisis could be sparked. The anti-establish coalition in Rome should be able to keep their voters on side, and more importantly keep the government bond market on side too. Politics never runs smoothly, and Italy’s long-term structural problems still persist, but for now investor confidence has been raised.   

The Federal Reserve hiked interest rates by 0.25% - in line with forecasts. It was the fourth rate hike of 2018.Jerome Powell, the head of the Fed, issued a dovish statement.  The central bank said the markets should expect two rate hike in 2019, but also acknowledged that inflation isn’t going according to plan, and that growth will be lower. 2018 was described as the strongest economic year since the credit crisis, and the Fed will monitor economic and financial developments. Mr Powell confirmed that political considerations play no role in Fed policy, and that statement was clearly aimed at President Trump, who has criticised the Fed for hiking rates too quickly. The update from the US central bank sent stocks tumbling – the Dow Jones and S&P 500 closed at their lowest levels in 2018, and the greenback recouped most of it’s earlier losses.

Stocks sold-off in Asia overnight as the declines on Wall Street weighed on global sentiment. The People’s Bank of China kept short-term borrowing costs unchanged overnight. The Bank of Japan kept monetary policy unchanged, and the central bank maintained its targets even though there are concerns about the health of the global economy.

UK CPI cooled to 2.3% in November from 2.4% in October, and that is of assistance to the British worker as UK average wages are growing at their fastest rate in 10 years. The gap in earnings and the cost of living is widening in favour of the worker. The core CPI report dipped to 1.8%, meeting expectations, and this is a little concerning as it indicates that demand is cooling. The UK retail sector has been fragile recently, and that doesn’t bode well for the economy seeing as we are approaching Christmas. UK retail sales will be announced at 9.30am (UK time), and on a month-on-month basis sales are tipped to increase by 0.3%, and that would be a big improvement on the 0.5% decline in October.

The Bank of England (BoE) will release its interest rate decision at 12pm (UK time) and no change is expected to the policy. Given that there is still so much uncertainty surrounding Brexit, it would be a shock if the BoE altered their policy.

Yesterday Canadian inflation took a knock in November as the headline CPI rate fell to 1.7% from 2.4%, and economists were expecting 1.8%. Even the core rate cooled to 1.5% from 1.6%. The sizeable fall in headline inflation isn’t a major surprise given the slump in the oil market, but the decline in core inflation is an indication that true demand is dwindling – a theme which is common in North America and Europe. The Canadian jobs market is robust, but the inflation figures might lead the Bank of Canada to hold fire on interest rates in January especially in light of the Fed’s dovish hike.  

EUR/USD – has been diving lower since late September and if it holds below the 1.1510/00 region, it could pave the way for the 1.1215 area to be retested. A move to the upside could run into resistance at 1.1490 – the 100-day moving average.

GBP/USD – bullish engulfing might see a move back towards the 1.2750 region. Another move lower might bring 1.2365 into play. 

EUR/GBP – the bearish engulfing might drive the market to the 200-day moving average at 0.8840. If the wider rally continues, it might target 0.9100.

USD/JPY – the upward trend that began in March is still intact, and if the positive move continues it might target 114.73. Support might be found at 111.39.

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