Daily Forex Outlook: What you need to know for Friday

The USD traded mixed on Thursday, as traders squared positions in the aftermath of a more hawkish-than-expected FOMC outcome, with the main takeaway being the increased rate hike expectations for Dec; optimism for a more aggressive tightening into 2018 is also on the rise. Against the Euro, the US Dollar gave back some of its gains, retracing over 50% of its Wed's decline to touch a high of 1.1940. The Pound, which held superbly well the stampede of USD buys on Wed, ends the day near daily highs at 1.3580. Cable caught strong bids after UK PM May is said to have offered 20bn euros to the EU during the Brexit transition period, with the condition of having access to single market and some form of customs union; the potential deal is seen as a good outcome for the UK. 

The Japanese Yen saw very little vola on the BoJ policy meeting, which turned out to be a low-risk event as expected. We remain in a downward bias, with USD/JPY testing offers above 112.50 and breaking the 200-day MA, the first time since late July. With regards to the Aussie, NY traders held onto a tight range after sharp losses earlier on the day, last quoted at 0.7930, with techs now clearly bearish. Unlike the Aussie, the Kiwi saw its losses contained by 0.73 ahead of this weekend's NZ general election. 

No much of a price story for the USD/CAD, consolidating its gains around 1.2330. In the commodity space, gold kept falling sub 1,300.00, as a temporary ease of North Korean headlines + hawkish FOMC kept longs at bay. In line with today's CAD price action, Oil also saw limited flows, rejecting a down-move towards $50.00 with a close of $50.75. Ross Burland, Analyst at FXStreet, made a few remarks on Oil, noting that "speculative traders repositioned ahead of this Friday's OPEC/Non-OPEC announcements, that is expected to boost oil on the prospects of an extension to the production cuts, or indeed, from any mention of oil controls are discussed and announced." Lastly, the S&P 500 saw a minor retracement on a low volume day, still keeping the bias clearly bullish as it holds above 2,500.00, near its all-time high. 

On the geopolitcal front, US President Trump announced an executive order targeting individual companies that were trading with North Korea. The new action is aimed at cutting off sources of revenue to N.Korea, with  main efforts to target N.Korean shipping and trade networks. According to sources, "the order gives treasury discretion to sanction foreign banks that conduct transactions tied to trade with N.Korea."

Heading into Friday, early in Europe, the focus will deviate between European manufacturing data (French, German, EU) and a long list of ECB speakers. At 06:45 GMT, ECB’s Hakkarainen will be participating in ESRB annual conf. in Frankfurt, at 07:15 GMT, ECB’s Coeure gives a keynote statement at a conf. in Sarajevo, while Draghi will give a keynote speech in Dublin at 08:00 GMT and later at 09:30 GMT, the ECB President will participate in a Student Roundtable/Dialogue. At 08:45 GMT, ECB’s Angeloni gives a Speech in Courmayeur, Italy, while ECB’s Constancio gives closing remarks at the ECB conference in Frankfurt at 11:15 GMT. At 13:15 GMT, ECB’s Constancio will also be chairing a panel at ESRB annual conf. in Frankfurt.

Later in the US session, at 13:30 GMT, Fed’s Kansas City President Esther George speaks in Oklahoma, while Fed’s Dallas President Kaplan participates in moderated Q&A in Oklahoma at 17:30 GMT. 

One of the focal points for Friday will be a much-anticipated speech from UK Prime Minister Theresa May in Florence. James Smith, Developed Markets Economist at ING, notes: "Ahead of the speech, various press reports suggest the UK is willing to make a net contribution of roughly €20 billion to ensure no other EU nation will need to make up a budget shortfall during a two-year transition. While she reportedly may not quote a specific figure in the speech, the gesture may help to foster a slightly more constructive dialogue between both sides during the next round of talks on Monday. But it is unlikely to be enough to convince EU leaders that enough progress has been made."

Mr. Smith adds: "The big sticking point is that the European side wants further commitments to honour longer-term costs, including pension liabilities, legal commitments and contingent liabilities, set aside in case a member state defaults on a loan. There's also the contentious issue of whether the UK's rebate, negotiated by Margaret Thatcher, should be included - and by extension, whether the UK should continue paying for farm subsidies, which the rebate was originally linked to."

Later in the US session, Canadian data will steal the spotlight, with the release of the monthly retail sales report and the latest inflation figures to guarantee wild swings in the Canadian Dollar. While the latter is expected to show a modest improvement, which would strengthen the case for further rate hikes by the BOC, the former (retail sales), while a 0.4% is expected, it is still short of the 0.7% reading achieved the prior month. The Canadian Dollar has been on a tear, despite the advancements came to an abrupt halt earlier on the week, when BOC Deputy Governor Lane made some jawboning comments on the CAD, a clue that the Central Bank is uncomfortable with such a rapid appreciation in the Lonnie. 

To top it off, over the weekend, two national elections will take place. Firstly in New Zealand, scheduled for Saturday 23 September, and one day later, the German election. 

On the NZ election, Westpac notes: "For much of this year, public polling suggested that National would gain the largest share of votes by a substantial margin, though it would still require the support of NZ First and/or other minor parties in order to reach a majority. However, the balance has changed dramatically since early August, when a change of leadership for the Labour Party revitalized its prospects. The election now looks very close. Which party is ahead now varies by polling company. Colmar Brunton polls suggest that the Labour Party is four percentage points ahead of National, Reid Research polls have National ten percentage points ahead of Labour, and Roy Morgan has the two parties within half a percentage point of each other."

As per the German general election, Omkar Godbole, Editor and Analyst at FXStreet, wrote: "Polls certainly suggest Angela Merkel will win a stunning fourth term as Europe’s most powerful leader. It has been reported that Angela Merkel squashed his opponent, SPD’s Schulz in a TV debate last week.  Polls following the 90-minute showdown gave Merkel, leader of the Christian Democratic Party (CDU) since 2000, a clear edge over Schulz, a former European Parliament chief and leader of the Social Democratic Union Party of Germany (SDP)." Omkar touches on a possible scenario post election results, should Merkel win, noting that "EUR/USD could rally sharply if Merkel changes her stance following a clear victory and talks about reflating the economy."