The major European indexes are trading in the negative territory on Wednesday as the risk aversion still prevails in the global markets. Italy hasn’t changed its budget plan despite the EU’s calls to revise the deficit target. Meanwhile, there are some signs of possible escalation of trade tensions between the US and Europe. In particular, EU trade commissioner Cecilia Malmstrom said the EU will hit back if US imposes tariffs on cars. She highlighted that Brussels is able to set up the list of counter measures very quickly and mentioned that the measures would include cars, agricultural products and machinery. As a reminder of slowing growth in Europe, Bundesbank pointed to a substantial increase of downside risks to the regional economy. As a result, Italy’s FTSE MIB loses 1.24 per cent to 18,987, Britain’s FTSE 100 adds just 0.09 per cent to 7,060, France’s CAC 40 sheds 0.30 per cent to 5,086, while German DAX 30 declines by 0.37 per cent to 11,429.
After failed attempts to regain the 1.13 figure, EURUSD resumed the decline following yesterday’s rally. Traders were not disappointed by Italy’s decision not to revise the budget as such a step was widely expected. The negative pressure on the single currency came rather from strong dollar and dismal economic data from Germany. The Q3 GDP contracted 0.2% vs. -0.1% expected – the weakest quarterly growth since Q1 2013. Meanwhile, better fundamentals from the euro zone have somehow capped the selling pressure as the industrial production and jobs data came in higher than expected, while the GDP was in line with projections. The pair found support at 1.1215 on Tuesday and the downside risks seem to be limited for the time being. But fresh headlines on possible US sanctions and Europe’s counter measures could fuel risk-off sentiment and drive the euro lower.
GBPUSD fell victim to profit-taking following the recent rally on the news of the draft Brexit deal. The pair fell from highs above 1.30 and eroded the 1.29 level as traders begin to shift their focus on the next key hurdles in the “divorce process”. Market participants start to admit the fact that the UK parliament is almost certainly not going to pass a meaningful vote on the deal. Meanwhile, EU sources report, technical Brexit agreement sees future of Irish border to be decided by July 2020. Apart from political issues, the cable is being dragged down by weak UK CPI data as the index rose 2.4% vs. 2.5% expected, pushing back rate hike expectations by the Bank of England. As such, the short-term outlook for the pound shows the pair looks vulnerable to further sales, especially on negative Brexit headlines. Technically, the immediate support comes at 1.2820.
USDJPY is holding in the positive territory but doesn’t dare to challenge the 114.00 level. The risk-off sentiment is not so intense to fuel a substantial yen demand, but still it prevents the greenback from a more robust rise. Despite the current dollar strength, there are still downside risks for the pair as investor confidence is getting lower with the emergence of fresh signs of slowing global growth. As the sentiment remains vulnerable, it’s better to be cautious with bullish bets because the yen may switch to offensive on negative headlines from different fronts including the crude oil market.
As for Brent, today we see some recovery attempts after a plunge by 7% on Tuesday. The price is trading above the $65 figure but faced resistance on the way to $67 earlier and was rejected. The updated OPEC estimates sent the oil aggressively lower as the cartel has downgraded oil demand outlook and raised the estimate of future production, which caused a massive sell-off in commodities. Today, many OPEC+ exporters tried to support prices and prevent further free fall, assuring the markets of the possibility to cut production in order to prevent another global glut. But the verbal interventions failed to impress traders as the oversupply fears still prevail. As such, the market needs a more significant support at this stage as investor sentiment looks too vulnerable. The downside risks are still there, and Brent could get back below $65 once again.
Nathan Lambert, Head of Global FX Analytical Department