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Price action on most pairs was a bit choppy during the morning London session, likely because traders were bracing themselves for the FOMC’s monetary policy decision.

The session wasn’t bereft of action and directional movement, however, since the euro and the Loonie were vying for the top spot, with the Loonie coming out on top.

The pound, meanwhile, was feeling intense bearish pressure, thanks to the U.K.’s CPI report.

As for the Greenback, it had a mixed performance during the session but was a net winner.

  • German PPI m/m: 0.1% vs. -0.1% expected, 0.3% previous
  • German PPI y/y: 3.3% vs. 3.2% expected, 3.3% previous
  • U.K. CPI m/m: 0.2% as expected vs. 0.1% previous
  • U.K. CPI y/y: 2.3% as expected vs. 2.4% previous
  • Core U.K. CPI y/y: 1.8% as expected vs. 1.9% previous
  • HPI in the U.K. y/y: 2.7% vs. 3.3% expected, 3.0% previous
  • U.K. PPI input m/m: -2.3% vs. -2.9% expected, 0.8% previous
  • U.K. PPI output m/m: 0.2% vs. -0.1% expected, 0.3% previous
  • CBI’s U.K. industrial order expectations: 8 vs. 6 expected, 10 previous

Major Events/Reports:

U.K. CPI report

The office for National Statistics (ONS) released the U.K.’s November CPI report earlier, revealing that CPI rose by 0.2% month-on-month as expected (+0.1% previous) and 2.3% year-on-year (+2.4% previous), also as expected.

However, the annual rise of 2.3% is below the BOE’s forecast of +2.5% in November, as laid out in the BOE’s November 2018 Inflation Report.

And a closer look at the details of CPI report also shows that 6 of the 12 CPI components printed weaker annual readings, while only 4 printed stronger readings, and the remaining 2 matched their respective previous readings.

And of the 6 CPI components that were drags, the weaker increases in transportation costs (+4.9% vs. +5.4% previous) and recreation (+2.5% vs. 3.2% previous) were the main sources of downward inflationary pressure.

E.U. accepts Italy’s budget

Italy’s budget saga has been pushed into the background lately, but there was a noteworthy development during the session, namely that the E.U. and Italy have reached a meeting of the minds on Italy’s budget since the E.U. has finally accepted Italy’s revised budget deficit target of 2.04% (2.4% originally), which means that Italy won’t be subjected to disciplinary measures … for now.

European Commission Vice President Valdis Dombrovskis did stress that Italy is still a potential source of future problems when he said that:

“The solution on the table is not ideal … It does not provide long-term solutions to the Italian economy’s problems, but it enables us, for now, to avoid opening a debt procedure, as long as the negotiated measures are fully applied.”

Risk appetite revived in Europe

The several days of risk aversion, the major European equity indices finally enjoyed a bout of risk aversion and were broadly higher during the session.

And according to market analysts, the risk-friendly vibes in Europe were due to expectations that the Fed may deliver a dovish hike later, which means relatively easier credit conditions in 2019, as well as strong demand for Italy stocks, particularly banking stocks, thanks to rumors and then confirmation that the E.U. and Italy have struck a deal on Italy’s budget.

  • The pan-European FTSEurofirst 300 was up by 0.48% to 1,350.25
  • Germany’s DAX was up by 0.65% to 10,810.68
  • The blue-chip Euro Stoxx 50 was up by 0.64% to 3,059.55

Major Market Mover(s):

CAD

The Loonie overpowered the euro to claim the top spot of the morning London session.

There were no apparent catalysts for the Loonie’s strength and oil prices were mostly steady during the session.

However, it’s possible that we’re just seeing some short-covering after two consecutive days of broad-based CAD weakness and/or preemptive positioning ahead of Canada’s CPI report.

USD/CAD was down by 24 pips (-0.18%) to 1.3447, AUD/CAD was down by 32 pips (-0.33%) to 0.9656, NZD/CAD was down by 26 pips (-0.28%) to 0.9218

EUR

The euro had a running start, thanks to rumors that Italy’s revised budget proposal has finally been accepted by the E.U.

And as mentioned earlier, the E.U. and  Italy were able to hammer out a deal, so Italy won’t be subjected to sanctions.

However, the official announcement actually caused the euro’s rise to stall, likely because of profit-taking.

EUR/USD was up by 7 pips (+0.06%) to 1.1404, EUR/CHF was up by 22 pips (+0.19%) to 1.1327, EUR/GBP was up by 37 pips (+0.41%) to 0.9032

GBP

The pound found itself at the bottom of the forex heap during the morning London and is also now the second weakest currency of the day (so far) after the Swissy.

The U.K.’s latest CPI report was able to meet the market’s expectations, but the detail of the report were not too good. More importantly, the annual reading missed the BOE’s own forecast by a couple of ticks, so the CPI report was actually net negative, especially with the BOE statement coming up tomorrow.

It’s therefore very likely that the CPI report attracted GBP bears to come out of the woods. However, the pound actually started encountering sellers about an hour before the CPI report was released. And aside from preemptive positioning ahead of the CPI report, there was no clear reason for the pound’s earlier slide.

GBP/USD was down by 43 pips (-0.34%) to 1.2625, GBP/JPY was down by 56 pips (-0.40%) to 141.82, GBP/CAD was down by 92 pips (-0.54%) to 1.6976

Watch Out For:

  • 1:30 pm GMT: Canada’s CPI (-0.4% expected vs. 0.3% previous)
  • 1:30 pm GMT: U.S. current account (-$125B expected vs. -$101B previous)
  • 2:00 pm GMT: SNB’s quarterly bulletin will be published
  • 2:00 pm GMT: CB’s leading Chinese index (1.2% previous)
  • 3:00 pm GMT: U.S. existing home sales (5.20M expected vs. 5.22M previous)
  • 3:30 pm GMT: U.S. crude oil inventories (-2.7M expected vs. -1.2M previous)
  • 7:00 pm GMT: Fed expected to raise target range for Fed Funds Rate by 25 bps to 2.25%-2.50% during the FOMC statement; read Forex Gump’s Event Preview
  • 7:30 pm GMT: FOMC presser
  • 9:45 pm GMT: New Zealand’s Q3 GDP (0.6% expected vs. 1.0% previous)
  • 9:45 pm GMT: New Zealand’s trade balance (-$880M expected vs. -$1,295M previous)