EUR/USD: Strong U.S. economy calls for gradual rate hikes - Yellen

Macroeconomic overview:

• The Labor Department said its CPI increased 0.5% last month after advancing 0.4% in August. The rise was the biggest since January and lifted the year-on-year gain in the CPI to 2.2% from 1.9% in August. Excluding the volatile food and energy components, consumer prices ticked up 0.1% as the increase in rental accommodation slowed and the cost of new motor vehicles, furniture and medical care declined. The so-called core CPI rose 0.2% in August. In the 12 months through September, the core CPI increased 1.7%. The year-on-year core CPI has now advanced by the same margin for five consecutive months.

• The Fed tracks the personal consumption expenditures price index excluding food and energy, which has consistently undershot the U.S. central bank's 2% target for more than five years. Fed Chair Janet Yellen has said that temporary factors such as one-off price cuts by wireless telephone companies are holding back inflation.

• In a separate report on Friday, the Commerce Department said retail sales jumped 1.6% in September likely as reconstruction and clean-up efforts in areas devastated by Harvey and Irma boosted demand for building materials and motor vehicles. Retail sales were also buoyed by a surge in receipts at service stations, which reflected higher gasoline prices. Last month's increase in retail sales was the largest since March 2015. Excluding automobiles, gasoline, building materials and food services, retail sales increased 0.4% last month after being unchanged in August. These so-called core retail sales correspond most closely with the consumer spending component of GDP.

• The pick-up in core retail sales suggests the drag on the economy from the hurricanes will probably be modest. The growth outlook was boosted by another report from the Commerce Department showing inventories recorded their biggest gain in nine months in August. inventories increased 0.7% after rising 0.3% in July. Inventories are a key component of GDP. They slipped 0.1% in July. August's gain suggests inventory investment could contribute to GDP in the third quarter after adding just over one-tenth of a percentage point to the 3.1% annualized pace of growth in the April-June period.

• The Atlanta Fed raised its third-quarter GDP growth estimate by two-tenths of a percentage point to a 2.7% pace after the data.

• Federal Reserve Chair Janet Yellen said the U.S economy remains strong and the strength of the labor market calls for continued gradual increases in interest rates despite subdued inflation. Yellen also said she expected the U.S. economy to exceed its long-term trend during the second half of the year and repeated the impact of recent hurricanes on the economy should be temporary.

• Fed officials largely shrugged off a weak jobs report for September and pinned the decline in employment on Hurricanes Harvey and Irma temporarily displacing workers. In her speech, Yellen said the most recent wage gains contained in the September jobs report were encouraging and that she expected the central bank to raise interest rates further.

• Boston Fed President Eric Rosengren said the Federal Reserve will probably need to raise interest rates in December and then three of four times "over the course of next year," assuming the U.S. unemployment rate continues to fall and inflation rises.

• To stabilize inflation at 2%, Rosengren said, "you might have to overshoot" by pushing rates higher than the level expected in a healthy economy. In September, Fed officials estimated that so-called neutral rate to be 2.8%. The comments mark Rosengren, who does not vote on policy this year, as slightly more hawkish than most of his colleagues.

• Young conservative star Sebastian Kurz is on track to become Austria's next leader after an election on Sunday, but his party is far short of a majority and likely to seek a coalition with the resurgent far right. Foreign Minister Kurz, who is just 31, managed to propel his People's Party to first place by taking a hard line on immigration that left little space between it and the far-right Freedom Party (FPO).  Both parties increased their share of the vote from the last parliamentary election in 2013, projections showed, marking a sharp shift to the right in the wake of Europe's migration crisis. Chancellor Christian Kern's Social Democrats were in a close race with the FPO for second place.

• Catalan leader Carles Puigdemont was expected to clarify whether he is calling for the region's independence from Spain today. Spain's Prime Minister Mariano Rajoy had given him a Monday deadline to clarify his position, and until Thursday to change his mind if he insists on a split, and said Madrid would suspend Catalonia's autonomy if he chooses independence.

• But Carles Puigdemont's letter, released about two hours before the deadline was set to expire, did not clarify whether he indeed had proclaimed that Catalonia had broken away from Spain. The central government had explicitly asked him to respond with a simple "yes" or "no" to that question. Instead, Puigdemont replied with a four-page letter seeking two months of negotiations and mediation. Spain has repeatedly said that it is not willing to sit down with Puigdemont if calls for independence are on the table, or accept any form of international mediation.

• Spain's government will take control of Catalonia and rule it directly if Catalan leader Carles Puigdemont does not drop a bid to split the region from Spain by Thursday at 8:00 GMT, deputy Prime Minister Soraya Saenz de Santamaria said.

• The European Central Bank's asset purchases are due to expire at the end of the year, and policymakers are set to decide on October 26 whether to prolong them. Policymakers are homing in on extending their stimulus programme for nine months at their next meeting while scaling it back. They will have to reconcile the bloc's best growth run in a decade with an inflation rate expected to undershoot the bank's target of almost 2% for years.

• The next move is still up for discussion, but there is a consensus that it should signal both the need to cut support in light of strong economic growth, while also committing to an extended period of monetary accommodation. The biggest debate is likely to be whether to keep the programme open ended, giving the ECB the flexibility to extend it once again, or to send a firm signal about the end. While hawks led by Germany want the ECB to signal its intent to wind down and end the purchases, policy doves want at least the same type of flexibility the bank has now to extend purchases in case the outlook worsens.

Technical analysis and trading signals:

• The EUR/USD is slightly below 7-day exponential moving average now. Last week’s reversal on the candles and break below 1.1800 is encouraging for the bears and the daily cloud base at 1.1703 could be their short-term target. The nearest support levels are: 10-dma at 1.1780 and daily low on October 10 at 1.1740.

• Our trading strategy is to use current dip to open a long position with the target at 1.2400, which we assess as a fair EUR/USD value from the fundamental point of view. We placed our stop-loss at 1.1585, below 50% fibo of June-September rally.

AUD/USD: Support from Chinese data, eyes on jobs report this week

Macroeconomic overview:

• Upbeat economic news from underpinned sentiment toward the commodity currencies. Data out on Monday showed China's producer prices rising at a rapid 6.9% annual pace in September, largely driven by strength in commodities.

• China's central bank governor predicted the economy would grow a brisk 7% in the second half of this year, accelerating from the first six months and defying fears of a slowdown. China publishes its third-quarter gross domestic product number on Thursday, with economists on average expecting growth of 6.8%.

• The main domestic event for the Aussie will be jobs figures for September on Thursday where we forecast a smaller rise of 22k following August's outsized gain of 54.2k.

• Supporting the Aussie was a second session of gains for iron ore, the country's single biggest export earner, amid rising prices for steel in China.

Technical analysis and trading signals:

• The AUD/USD rally off October’s low extends. The 14-day exponential moving average was pierced on Friday.

• We stay long for 0.8120.