European stock markets are recovering in a cautious manner on Wednesday ahead of the crucial FOMC decision due later today. Investor optimism is due to speculations the Federal Reserve will deliver a “dovish’ hike and hint at fewer rate hikes for 2019 than previously expected, citing financial market volatility and signs of slowing growth and inflation. Te reports that the European Commission decided not to open excessive debt procedures on Italy adds to market bullishness after recent sell-off. Meanwhile, US and China are reportedly said to have clashed on trade at recent WTO meeting, which could cap the upside potential in global stocks later in the day.
So far, German DAX 30 rebounds by 0.48% to 10,792, Italy’s FTSE MIB now adds 1.64 per cent to 18,952, Britain’s FTSE 100 rises by 0.70 per cent to 6,748, while France’s CAC 40 gains 0.41 per cent to 4,773. US stock index futures extend gains on earlier talks on further US progress in trade negotiations with China.
The buck is under a widespread pressure as traders continue to exit USD longs amid the heightened uncertainty ahead of the FOMC decision. However, the current market expectations of a ‘dovish’ rhetoric look too dramatized, so should the central bank refrain from an obviously negative and cautious tone, the US currency may gain some support and even stage a relief rally.
EURUSD is gaining traction today. The pair touched the 1.1413 level for the first time since December 10. Despite the bullish tone prevails, the euro’s upside potential looks limited as traders tend to be cautious ahead of important central bank decisions. The European Commission will hold press conference on Italy budget talks later in the day, so the bullish impulse could accelerate somehow should the EU officials confirm their unwillingness to open excessive debt procedures. Technically, the euro is still stuck within a limited trading range and remains vulnerable as long as it stays below the important 1.15 level. This resistance may be broken if the Fed disappoints the USD immensely.
GBPUSD continues to rise for a third day in a row but the overall dynamics looks unsustainable due to the prevailing uncertainty around Brexit. The current mild bullishness in the sterling is mostly due to dollar weakness, as the outcome of the divorce process is still far from certain. Most traders prefer to sit on the fence until more details on Brexit come out. The next crucial event in this contest is the parliamentary vote due mid-January. Until then, cable will likely remain hesitant and will continue to be an attractive sell on rallies. From the technical point of view, GBPUSD needs to get firmly above the 1.2750 area, while on the downside, the immediate support comes at 1.2555.
USDJPY proceeds with its bearish path since last Friday. Since then, the pair has dropped from the highs in the 113.70, down to end-October low of 112.18. Depending on the Fed meeting outcome, the price may derail the important 112.00 support and refresh the lows. But on the other hand, a potentially ‘dovish’ tone by the central bank could fuel risk demand and cap the yen’s appeal at the same time. So the dollar’s downside potential looks limited from this point of view.
Brent crude is licking its wounds around $56.50 after an earlier dip to fresh 14-month lows below $56. The oil market continues to price in another global glut in 2019 due to high expectations for further rise in the US shale activity and weaker global demand. The overall picture remains gloomy in the absence of positive drivers, while the general investor cautiousness in the global financial markets adds to the bearishness in oil. Brent will likely remain under pressure in the short term – both fundamentals and technicals don’t allow to expect a substantial recovery for the time being.
Nathan Lambert, Head of Global FX Analytical Department