European markets are trading higher on Monday despite the lingering concerns about Italy and Brexit. The buying pressure has been limited though, which confirm a cautious investor stance. The future of Brexit deal is still under question. After a series of resignations last week, May’s position is under a threat. According to the Times, above 50 MPs give firm pledges to submit the letters of no-confidence in the Prime Minister. At that, May still says that he is determined to deliver her Brexit deal. Italian bank shares are rising amid reports that France and Germany could lay out plans for a limited joint euro zone budget. Meanwhile, Italy’s FTSE MIB adds 0.40 per cent to 18,953, Britain’s FTSE 100 gains 0.51 per cent to 7,049, France’s CAC 40 rises by just 0.06 per cent to 5,028, while German DAX 30 loses 0.04 per cent to 11,335. US stock index futures look steady at the start of a trading week shortened by the Thanksgiving holiday.
The greenback shows mixed dynamics on Monday. The latest Fed officials’ comments were on the dovish side. The central bank seems to be concerned about the global economy prospects which could in turn affect its policy normalization process. Against this backdrop, market expectations of rate hike in 2019 are getting lower and thus pressing the buck. At the same time, the ongoing trade war between the US and China and lack of progress in negotiations cap the downside pressure on the American currency due to its safe-haven status.
Amid a weaker dollar, EURUSD is inching higher today, with the pair has extended gains to 11-day highs in the 1.1435 area so far. Euro zone September construction output came in at +2.0% versus -0.5% earlier, which provided some support for the euro as well. Meanwhile, the downside risks for the single currency from the Italian factor are still there. Italy’s deputy Prime Minister Salvini said he could oppose Franco-German euro zone budget proposal, which brings more uncertainty in the issue. The European Commission will complete its assessment of the revised budget and present its opinion on Wednesday. Given that the deficit target was unchanged, there is a high probability that the EU will reject the plan once again and start to discuss imposing penalties. So the euro could face further selling pressure amid the rising budget tensions. Technically, the pair has a low chance for a break above 1.15 at this stage, while the risk of declining under 1.14 is growing.
USDJPY struggles for direction marginally below the 113.00 threshold. The pair lacks the impetus to proceed to a recovery after Friday’s plunge as investors still prefer to buy safe assets amid a number of global uncertainties and risks. As long as the trade war, Brexit drama and Italy’s budget woes continue to unnerve investors, the Japanese yen remains attractive for buyers, especially amid the recent dovish hints by the Fed officials. The price needs to make a clear break above the 113.00 handle in order to make further steps north, but the upside potential is limited in the short term. The immediate support comes at 112.60.
Brent crude turned negative on the day after the recent failed attempt to challenge the $68 barrier. OPEC output curb plan has supported the market last week but the inability of prices to stage a more robust recovery confirms that the positive signals from the cartel are still overshadowed by the US shale production and the lingering fears of the global supply glut next year. So, despite the recent corrective rebound in Brent, oil traders are still cautious amid further signs of rising activity in the US. By the way, the number of oil rigs increased by two over the last week – to a fresh high since March 2015.
Gold prices were rejected from highs above $1,225 on Friday and struggle to continue the recovery since then. The yellow metal is desperately trying to hold above the $1,220 figure though the sentiment looks unstable and mixed. As soon as the dollar direction gets clearer, the bullion will show a more sustainable dynamics in either way. So far, the prices need to hold above $1,210, while the mentioned high represents the immediate upside target.
Nathan Lambert, Head of Global FX Analytical Department