Risk-on sentiment creeps back in on Tuesday, with European stock markets bounce back. Investor sentiment improves mainly due to positive corporate earnings which took the central stage while the complex trade war continues to innerve markets. Europe’s auto shares lead the gains, up more than 1 percent, bank stock also perform well. UniCredit shares rose after the Italian lender reported its second-quarter profits declined less than expected. Meanwhile, Commerzbank shares lost nearly 3% despite a stronger-than-anticipated net profit in the second quarter as the bank warned of higher costs to its corporate clients this year. As such, Britain’s FTSE 100 adds 0.99 per cent to 7,740, France’s CAC 40 gains 0.87 per cent to 5,525, while German DAX 30 rises by 0.84 per cent to 12,704. US stock index futures point to a strongly higher open, with S&P500 look set for new record.
The greenback retreats across the board after yesterday’s rally. The risk-off sentiment has abated and thus deprived the safe-haven currency of a local support. The USD index was therefore rejected from 3-week highs and has been trading under a decent pressure. Lack of interesting economic releases makes the buck even more dependent on the general market sentiment in the context of a trade war. So any fresh sign of another escalation of tensions between the US and China could fuel the widespread dollar demand again.
Against this backdrop, the EURUSD pair has recovered from late-June lows in the 1.1530 area and is changing hands around the 1.16 threshold. Despite the pullback, the single currency remains vulnerable as the dollar remains stronger fundamentally, both in terms of a trade war and in the context of diverging monetary policy. Moreover, the euro could face another risk factor as the new Italian government could increase public spending, which will further increase the country’s large public debt. From the technical point of view, the pair needs a daily close above the 1.16 threshold to confirm a bounce and proceed with recovery towards the 20-DMA in the 1.1660 region.
The pound has also partially rebounded from lows, but the impetus looks too timid to expect more sustainable rise in the nearest future. GBPUSD bounced from 11-month low in the 1.2920 area, however remains below the 1.30 handle despite the general dollar retreat. The pound’s dynamics confirms that concerns over a ‘no-deal’ Brexit continue to persist in the markets. In the coming days, the general USD sentiment and Brexit headlines will continue to drive the pair, while on Friday the economic data from the UK and the US will set the tone. As for the immediate price action, the pair is unlikely to stage a daily close above the 1.30 figure.
USDJPY has resumed the downward move after a mild rebound yesterday. The pair struggles to regain the 112.00 barrier since July 20, while on the downside the dollar receives support in the 110.50 area. Should this support zone remain intact in the nearest future, the price could resume the ascent with the immediate target at 111.70, where the 20-DMA lies. The nearest local resistance comes at 111.50. Tomorrow morning Chine announces trade balance data, which is especially important for markets amid the ongoing trade war. So the number could affect investor sentiment and change the direction in the pair.
Brent crude continues its recovery on Tuesday. The price has regained the $74 threshold which now comes as support again. The barrel has refreshed August highs shy of the $75 figure. The latest bullish driver for the market is the reimposing of US sanctions on Iran. This was the first package, while the second set of sanctions comes back into force on November 4. This second package will restrict sales of oil and petrochemical products from Iran. Assessing the potential consequences for the global supply, traders resumed buying of crude oil, though some bearish factors, including increasing production within OPEC, could restrain the rally down the road.
Nathan Lambert, Head of Global FX Analytical Department