European markets are trading higher Monday, with utility stocks leading the gains. Investors continue to cheer easing of political risks in Italy and Spain, while some corporate news add to the positive sentiment in the region. Bank shares received a boost from reports that Societe Generale and Unicredit are exploring the possibility of a merger. Meanwhile, trade war fears don’t affect the regional markets so far, though the risks from this front persist as Trump’s rhetoric may fuel rather aggressive response from the European side. So far, Britain’s FTSE 100 adds 0.51 per cent to 7,741, France’s CAC 40 gains 0.31 per cent to 5,482, while German DAX 30 rises by 0.28 per cent to 12,760. US stocks futures point to solid open for Wall Street, despite the trade-war worries.
The greenback is on the defensive today, with the currency failed to gain a significant support from a spectacular Friday’s US jobs report. This is partly due to geopolitical uncertainty amid Trump’s trading threats, as well as amid the US 10-year Treasury yields failing to recover back above the 3.00% threshold. Another reason for the local dollar weakness is the euro rise as the single currency appreciated due to easing political uncertainty in Europe. After Italy has formed a government, the ECB rate hike expectations came back on the agenda again. At least, the money market shows that traders have already priced in the first ECB hike in Q3 2019.
However, apart from that, there are no significant factors in favor of monetary policy tightening in the euro area as the regional economy continues to slow down. Sentix investor confidence index came in at just 9.3 in June which is the lowest figure since October 2016. Meanwhile, PPI was 0.0% in April vs. +0.2% expected. The pair could retreat in the short term, especially should tomorrow’s euro area PMIs and retail sales data come in on a weaker side. Technically, EURUSD needs to overcome the 20-DMA around 1.1760 in order to confirm its local rebound, while the overall picture confirms that the UDD bullish trend remains intact.
GBPUSD is trading with an upside bias for a fourth day in a row. The risk-on sentiment coupled with some dollar weakness have formed the conditions for a recovery in the pound. The pair has faced a local resistance at 1.34 which prevents the price from a rise towards the 20-DMA around 1.3420. The UK construction PMI, which came in better than expected, added to the bullish pressure today. Nevertheless, despite the upside bias persists, the bearish risks for the pair are still there as the buck may regain its attractiveness for bulls after the ongoing correction. Only a sustained break above the 200- and 100-DMAs at 1.3590 and 1.3880 will confirm the easing selling pressure persisting since mid-April, when the dollar started its march north.
USDJPY is attempting to keep the upside bias after a spectacular jump on Friday. The pair refreshed May 28 highs at 109.76 early in Asia and since then mostly consolidates around the 109.50 area. Despite the widespread risk-on sentiment, the greenback fails to accelerate the recovery which may signal about lack of the overall impetus in the American currency at this stage. Moreover, as the trade-war fears may yet reemerge at any point, there is a risk of another sell-off in the pair as the safe haven yen demand may return. In this scenario, the price could lose the 109.00 mark again, but the support area just above the 108.00 level should remain intact.
Brent crude is trading mostly with a bearish bias on Monday after a rather sharp drop late last week. In looks like the effect from the expected supply cut in Iran and Venezuela is gradually abating as the market participant start to shift focus from this factor to the upcoming OPEC+ summit in Vienna this month. There is a risk that the participants will opt to gradually increase production, citing the ongoing rebalancing process in the global markets. So the volatility may rise ahead of this major event, and prices will likely be very sensitive to any hints and signals from the cartel in the coming days. In such a nervous environment, the potentially bearish US production and inventories data this week may fuel the ongoing profit taking in the market. Brent has already slipped to May 30 lows earlier today and remains marginally lower on the day, with downside risks still remain in the short term.
Nathan Lambert, Head of Global FX Analytical Department