Global stocks were pushed lower on Friday after the Fed leaved rates unchanged but hinted at further gradual tightening. The hawkish tone by the central bank made investors resume risk aversion. It was especially relevant following a post-election rally as profit taking looked very attractive. Apart from the aggressive FOMC, European stocks are pressed by lingering worries about Italy’s budget amid lack of progress in resolving the issue with the EU officials. Brexit uncertainty adds to the market nervousness as well. As such, Italy’s FTSE MIB loses 1.31 per cent to 19,175, Britain’s FTSE 100 sheds 0.80 per cent to 7,083, France’s CAC 40 falls 1.09 per cent to 5,075, while German DAX 30 sheds 0.77 per cent to 11,438. US stock index futures point to second day of declines for US stocks.
The greenback demand was initially fuelled by souring investor sentiment following a positive knee-jerk reaction to the US election outcome. Then, the hawkish FOMC statement added to the buying pressure, though the market activity turned lower during the European session. The key reason behind the local dollar rally is the monetary policy divergence as investors are sure now that the Fed will hike in December again – for the fourth time this year. The economic fundamentals play into dollar’s hands as well, while budget woes in Italy and risk aversion complement the bearish picture. Technically, the downside pressure is limited as long as EURUSD stays above the 1.13 handle, but there is a risk of another sell-off in the short term.
Cable is also under pressure from dollar bulls. Besides, there are worrying economic signals from the UK as total business investments fall in every quarter this year for the first time since 2009, as the GDP report showed. Meanwhile, the UK economy rose 0.6% in the third quarter, in line with projections. GBPUSD briefly dipped below the 1.30 figure and is now trying to regain this critical level in order to avoid further decline. A daily close below this area will signal some worsening in the short-term technical outlook.
USDJPY turned negative following a five-day winning streak as risk sentiment turned sour. The pair was rejected from fresh one-month highs marginally above the 114.00 handle but stays close to the psychological level due to a general pick up in the USD demand. In the short-term, the price will likely remain under pressure, while any progress on trade, Italy or Brexit could spark a risk trade rally once again down the road. On the downside, the 113.50 region is crucial for the dollar.
The selling pressure in the crude oil market has intensified on Friday, with Brent eroded the $70 mark for the first time since April. The barrel has registered a low of $69.11 and makes shallow recovery attempts, staying deep in the negative territory in the daily and weekly charts. The prices are pressured by rising oversupply concerns coupled with worries about the economic slowdown that could hurt oil demand globally. By the way, Brent is set for a fifth straight week of declines, entering the bear market after a jump to four-year highs in early October. The unresolved trade dispute between the US and China adds to the downside pressure in the market. In the short-term, Brent could get back above the $70 barrier should the dollar rally show some signs of waning and the Baker Hughes report point to a decline in rig counts in the US.
Nathan Lambert, Head of Global FX Analytical Department