After yesterdays’ recovery, European stock markets are back in the sea of red, with rising global bond yields is scaring investors off. Besides, the local investors continue to monitor events in Italy, while rising oil prices underpin energy stocks. Another “hawkish” remark by the Fed’s Powell keeps the riskier assets under pressure as well. In particular, the Federal Reserve Governor said that the bank was a long way from neutral on interest rates, which means the regulator will continue to tighten its policy down the road. As such, Italy’s FTSE MIB sheds 0.40 per cent to 20,653, Britain’s FTSE 100 loses 1.00 per cent to 7,440, France’s CAC 40 declines by 1.05 per cent to 5,434, while German DAX 30 falls by 0.28 per cent to 12,254. US stock index futures drop sharply amid rising rates.
The greenback retreats marginally against major currencies in a correction mode after a sharp spike yesterday. EURUSD recovers from low of 1.1460 but fails to regain the key 1.15 figure so far. The US Treasury yields remain elevated around 3.20% which caps the local downside pressure on the buck and thus limits the euro’s upside potential as well as the remaining uncertainty around Italy. Tomorrow’s US NFP employment report is another risk event for the pair. Should the jobs rise in line with ADP estimate, the dollar will receive additional support, though the wages data is the key for USD direction in the end of the week. The current rebound in prices may be another selling opportunity against the backdrop of a fundamentally strong dollar. As such, the pair will hardly be able to stage a robust recovery above 1.15 in the near term, and the downside risks continue to prevail for now.
GBPUSD has recouped yesterday’s losses and climbed back to the levels close to the key 1.30 handle. Apart from dollar strength, the pound is still under pressure from Brexit uncertainty. The recovery potential is capped now by recent PM May’s comments at the Conservative Party’s Conference, where she said that Britain is not afraid to leave with no deal. Technically, the pair is capped by the 1.30 figure. To get back above this level, the cable needs to see a more significant correctional pressure in the greenback. But the USD index remains afloat due to high Treasury yields. Therefore, the potential for a more robust rebound is low at the moment, unless some positive news arrive from the Brexit front.
USDJPY corrects lower after a brief spike towards fresh 2018 highs in the 114.50 area. The pair nevertheless remains above the 114.00 handle which confirms the limited pressure on the greenback. Moreover, even in case of a deeper retreat, traders will likely resume dollar buying at more attractive levels as the USD benefits from the Fed’s tightening bias in contrast with the accommodative policy by the Bank of Japan. As such, should the global stocks refrain from a more aggressive decline, the pair will soon regain the upside bias and could challenge the 114.50 region once again.
Crude oil prices remain bid on Thursday, with Brent holds firmly above the $86 handle after a spike to fresh four-year high of $86.70 yesterday. The market has ignored the bearish EIA report that showed that the US crude oil inventories jumped by 8 million barrels last week, while production levels remained unchanged at 11.1 million barrels per day. Traders are obviously focused on the US sanctions on Iran due to take effect in November, and market participants doubt that other OPEC producers will be able to compensate for the shortfall. The technical picture for Brent looks strong either. After a break of the $85 figure, the price targets the next major barrier at $90 which could be challenged during the next week or so should concerns over global supply deficit continue to rise.
Nathan Lambert, Head of Global FX Analytical Department