European markets opened higher on Thursday morning but turned slightly negative since then as investor optimism over the US midterm elections outcome has been abating. The increasing uncertainty over Brexit amid a string of conflicting signals makes markets nervous as well. Besides, concerns over the US-China trade war are still there. In a recent sigh of increasing tensions between the two countries, China's president Xi Jinping said that US should respect Beijing’s legitimate interests. As such, Britain’s FTSE 100 trimmed gains and adds just 0.34 per cent to 7,141, France’s CAC 40 loses 0.01 per cent to 5,137, while German DAX 30 sheds 0.14 per cent to 11,562. US stock index futures turned the corner as well, with Nasdaq and S&P futures are down by 0.6% on average.
The dollar is back on the offensive on Thursday as traders have digested the election results. The buying interest has also picked up ahead of the FOMC meeting results due later today. Investors expect Powell to express optimism over the US economy and further tightening. EURUSD, which failed to challenge the 1.15 level yesterday, turned red in the daily charts and is desperately trying to stay above the 1.14 support. Apart from the resurgent dollar demand, the euro is under pressure due some other factors. In particular, the European Commission cut its 2019 growth forecast to 1.9% from 2.0% and, more importantly, highlighted the mounting risks from Italy. The Commission expects that the 3% deficit limit will be breached by 2020. This came as a reminder of budget woes in the third-largest euro zone economy. By the way, Italy itself reiterated that it’s not planning any change to budget for now. As such, the short-term risks for the pair are skewed to the downside, and hawkish Fed could serve as a trigger for a more aggressive retreat.
The pound turned lower as well. GBPUSD was rejected from the 1.3150 area earlier in the day and got back below the 1.31 figure, primarily due to dollar rebound. Besides, sterling was disappointed by contradictory Brexit headlines that continue to unnerve traders. Ireland's EU commissioner Phil Hogan said that Brexit deal in November is unlikely if they don’t get proposals in the next few days. There are also reports that UK may ask Brussels for more time to cut a Brexit deal with Cabinet. Meanwhile, according to other sources, British Cabinet meeting on Brexit is unlikely to take place ahead of next week. Against this backdrop, the pound mostly ignored the reports that Brexit deal could be reached in the coming days. Besides, market participants understand that there is no way for euphoria until Theresa May comes up with a feasible proposal on the backstop that would satisfy the EU officials, the DUP and the British parliament. So the downside risks for the cable prevail at the moment and it’s rather dangerous to buy the pound on rallies until the real progress is reached. Technically, GBPUSD needs to stay above 1.3070 in order to avoid a more intense selling pressure.
Brent is lacking the buying interest on Thursday. After a mild recovery yesterday, the price struggles to extend the gains and has settled around the $72 figure. The market has digested the bearish EIA report that showed that crude oil inventories rose nearly 6 million barrels, while the output jumped by 400K barrels per day- to a new record high. Meanwhile, Brent is somehow supported by recent speculations on the possible discussion of declining production during the OPEC+ meeting in Abu Dhabi this Sunday. As the US sanctions on Iran are not as drastic as was expected, the risk of oversupplied global market is rising again. So the cartel and its allies will probably really have to resume production curbs in 2019. As such, Brent will likely continue its consolidation before the end of the trading week. The immediate downside risk for crude oil prices is the FOMC meeting that could fuel dollar demand.
Nathan Lambert, Head of Global FX Analytical Department