European markets are slightly higher on Tuesday ahead of the Federal Reserve meeting, with most market participants anticipate the central bank to strike a more dovish tone on Wednesday amid signs of slowing global economic growth. Investors also continue to monitor Brexit developments and uncertainty around the divorce process. On Monday, the speaker of Parliament ruled that British Prime Minister Theresa May could not put her divorce deal to a new vote unless it was re-submitted in a substantially different form. Today, Germany’s Merkel said she will fight to the last minute for an orderly Brexit, which brought some relief to investors.
Against this backdrop, Britain’s FTSE 100 adds 0.39 per cent to 7,327, France’s CAC 40 is up 0.46 per cent to 5,437, while German DAX 30 rises by 0.85 per cent to 11,756. US stock index futures are set to open higher as investors await the Fed meeting. Amid expectations the Federal Reserve could strike a dovish tone, the dollar remains on the back foot against major rivals on Tuesday. EURUSD extended gains to fresh two-week highs around 1.1360, mainly driven by dollar weakness. Interestingly, the pair holds high ground despite mixed economic data from the Eurozone. German March ZEW survey current situation came in at 11.1 versus 13.0 expected. Expectations recovered to -3.6 versus -11.0 expected, which made the picture more optimistic. According to the survey, sentiment towards major economic risks are considered to be less dramatic than before, with progress made between US-China trade talks is said to have contributed to the better outlook in this month's reading.
On the other hand, Eurozone January construction output came in at -1.4% versus -0.4% in the previous month. However, a poor reading was slightly tempered with by the more positive revisions - the prior result was revised from+0.7% to +2.1%. Further dynamics in the EURUSD pair depends on the dollar reaction to the Fed meeting results. A break above 1.1360, where the 100-DMA lies, will open the way to the 1.14 handle. On the downside, the 1.1325 area serves as the intermediate support.
Brent crude hover at fresh four-month highs above $68, targeting the next major threshold at $70. On Monday, OPEC cancelled its planned April meeting, effectively extending the supply cuts deal until at least June, when the next meeting will take place. By this step, the cartel and its allies have brought some stability to crude prices and calmed down investors. Also, US sanctions against Iran and Venezuela continue to boost prices as well as signs of slowing activity in the US shale oil fields. Easing concerns over the slowing global growth also play into the market’s hands. Now traders await the weekly US stockpiles report due to be published by API later today. Should the numbers point to another decline in inventories, Brent could extend the rally in the short term.
Nathan Lambert, Head of Global FX Analytical Department