European stock markets opened higher on Wednesday and accelerated the ascent after the US Treasury Secretary Steve Mnuchin urged lawmakers to approve s new stimulus package to help the country’s economy to recover from the coronavirus pandemic. Also on the positive side, Eurozone July PPI came in at+0.6% versus +0.5% m/m expected. In the United States, MBA mortgage applications last week arrived at -2.0% versus -6.5% prior. German retail sales provided a negative surprise, falling 0.9% in July, and previous data were also revised downward. Meanwhile, China's cabinet said today that the government will keep prudent monetary policy appropriate and flexible. The cabinet has also approved rules on market access for financial holding companies.
Against this backdrop, the UK FTSE 100 index edges higher by 1.50% to 5,950, Italy’s FTSE MIB rises by 2.11 percent to 20,007, France’s CAC 40 rallies by 2.24 percent to 5,048, while German DAX 30 rises by 2.25 percent to 13,266. U.S. stock index futures are pointing to a positive open in the US on Wednesday.
In currencies, the dollar extends the recovery after a reversal seen yesterday. The bounce looks appropriate considering the oversold conditions, rising Treasury yields, as well as strong US economic data. As such, EURUSD retreated from the 1.20 level to the 1.1850 region, with dismal Germany’s retail sales data adding to the local selling pressure surrounding the common currency. However, if the mentioned support holds, the pair could regain ground quickly as the greenback remains within a downward trend.
USDJPY extends gains for the third consecutive day on Wednesday, having climbed to the 106.20 area. The pair exceeded the 20-DMA on the way north but the greenback is yet to confirm a break above this moving average that turned into resistance on many occasions. If the pair remains on the offensive in the near term, the dollar could target the 106.60 intermediate resistance next. On the downside, the 106.00 handle acts as the immediate support. Considering the prevailing positive risk sentiment, USDJPY will likely preserve the upside momentum for now.
Meanwhile, Brent crude hesitates, struggling for direction on Wednesday. However, as the bullish bias prevails, the prices may regain the $46 handle if the upcoming EIA report confirms a decent contraction in the US crude oil inventories. On the other hand, the upside potential in the market looks limited due to a widespread recovery in dollar demand. In a wider picture, Brent continues to slowly grind higher, extending the recovery from April lows.
Nathan Lambert, Head of Global FX Analytical Department