Stock markets in Europe closed lower yesterday as traders were worried about the actions of the Federal Reserve from Wednesday. 

China is cooling and the eurozone is slowing down, and the some of the economic indicators from the US have been a bit soft recently, but yet the Fed hiked rates and suggested that two more interest rate hikes were lined up for 2019. The US central bank cautioned that inflation and growth are likely to be lower next year, but still declared further monetary tightening is in the pipeline. The speculation the US economy could be headed for a recession has ticked up, and that weighed on global sentiment. The Fed did caveat their tightening plans, by stating any further hikes will be dependent on solid economic data – so there are brakes in place. It was another painful session on Wall Street last night as the Dow Jones dropped nearly 2%, and the S&P 500 lost over 1.5%. Fear about a US government shutdown is playing into the mix too.  

Asian equity markets sold-off last night as global uncertainty persists. The US charged two Chinese national for hacking, and it has been alleged that the two individuals were operating in conjunction with the Chinese government – Beijing strenuously denies these claims. The move is likely to put a strain on US-China relations.  

The US jobless claims rate edged by 8,000 to 214,000 – largely in line with forecasts. Keep in mind, in September there was a reading of 201,000 - which was the lowest in nearly 49 years. Irrespective of the increase in the jobless claims, the US jobless market is robust. The Philly Fed manufacturing index fell to 9.4 – the lowest reading in over two years. There are a few cracks beginning to show in the US economy, and higher interest rates are likely to make matters worse.

At 1.30pm (UK time), the final reading of US GDP will be released and dealers are expecting 3.5%. At the same time, the durable goods report will be released and the consensus estimate is 1.6%. The core PCE reading is the Fed’s preferred measure of inflation, and it is tipped to increase to 1.9%.   

The UK revealed mixed retail data yesterday. The November retail sales report jumped by 1.4%, which easily topped the 0.3% forecast, and was a huge improvement on the 0.5% fall in October. The CBI realised sales report for December swung to -13, the lowest reading in 14 months. The contradiction in the reports could be down to the possibility that Brits did the bulk of their Christmas shopping last month.

The Bank of England (BoE) kept rates on hold, which wasn’t a surprise. The central bank warned that uncertainty surrounding Brexit has ‘intensified considerably’. The BoE reiterated their view that if there is an orderly Brexit, rates might be raised by 0.25% per year to keep inflation in check. At 9.30am (UK time), the third-quarter GDP reading will be released, and on a quarterly basis the forecast is 0.6%, and on a yearly basis, traders are expecting 1.5%. Public sector net borrowing is tipped to fall to £7.05 billion, from £7.95 billion in October. 

It was déjà vu for oil as the commodity slumped again. A mixture of over-supply concerns, and fear about what the Federal Reserve might do next year weighed on the energy. 

The weakness in the US dollar helped drive gold to a new five month high. The metal endured a sizeable sell-off between April and August, but since then it has been has been slowly staging a comeback.  

Canadian data will be in focus today, and the monthly GDP report is expected to be 0.2%, and the retail sales update is expected to show an increase of 0.4%.  

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 the 1.1620 region.

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 0.8842. If the wider rally continues, it might target 0.9100.

USD/JPY – has been weak recently, and a further move to the downside might bring 110.88 – 200-day moving average into play. A break above 113.70 might put 114.73 on the radar.

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