European stock markets weakened after a positive start on Tuesday as investors shifted to profit-taking after a short-lived rally witnessed at the start of the trading week. On Monday, regional markets saw decent gains after a proposal from France and Germany to create a 500-billion-euro recovery fund while a promising trial of a vaccine from coronavirus added to the upbeat sentiment.
Now, the optimism seems to be waning, and all major indexes have settled in the negative territory. In part, this was due to fresh weak economic data. Car registrations in the European Union plunged 76% last month while the U.K. claimant count surged dramatically. Also, investors are getting more cautious ahead of the testimony from Federal Reserve Board Chairman Jerome Powell and Treasury Secretary Steven Mnuchin. Against this backdrop, UK’s FTSE 100 sheds 0.63 percent to 6,010, Italy’s FTSE MIB edges lower by 1.74 percent to 17,097, France’s CAC 40 declines by 1.23 percent to 4,442, while German DAX 30 loses 0.93 percent to 10,952. U.S. stock index futures are also retreating as coronavirus vaccine-boosted rally faded and gave way to the lingering US-China trade tensions. Besides, traders are getting nervous ahead of US housing starts and building permits data for April and Powell’s testimony.
Elsewhere, the dollar continues to lose ground against the euro and sterling. EURUSD has exceeded the 1.0950 resistance in recent trading and refreshed two-week highs around 1.0975, where the 100-DMA lies. Once above, the pair will target the 1.10 handle. GBPUSD is changing hands around 1.2250 but remains shy of the 50-DMA marginally below 1.23. If risk sentiment continues to deteriorate in the near term, the cable may retreat from the current levels amid the potential profit-taking. Meanwhile, USDJPY remains stuck between the key moving averages but retains its bullish bias since Monday. Today, the pair extended gains to 107.65 but may give up some gains if risk aversion reemerges in the short term.
Meanwhile, Brent crude registered fresh highs around $35.70 and started to retreat as investor optimism started to wane after a rally. Still, the short-term technical picture in the market looks better now, when the prices have exceeded the $35 handle. Hopes for a rapid economic recovery from the coronavirus crisis coupled with expectations of deeper output cuts in June will likely continue to support the market. On the other hand, as the fundamentals remain gloomy, the upside potential is now limited.
Nathan Lambert, Head of Global FX Analytical Department