Positive developments in Europe allowed for a positive start of the session in the regional stocks on Monday. Over the weekend, the EU leaders approved the Brexit withdrawal deal laid out by Theresa May, which has brought some relief to investors. Meanwhile, Italy's deputy prime minister Matteo Salvini said the government has had positive feedback from the European Commission on lowering the 2019 budget deficit. These reports have lifted the sentiment in the stock markets as well as in the Forex market, where the euro and sterling are recovering against the dollar after a dip late last week. The next major event that will define further investor sentiment will be a G-20 summit set to take place in Argentina later this week, where Trump and Xi Jinping are due to meet. On Monday, Italy’s FTSE MIB rallies 2.68 per cent to 19,217, Britain’s FTSE 100 adds 0.87 per cent to 7,013, France’s CAC 40 gains 1.02 per cent to 4,997, while German DAX 30 rises by 1.19 per cent to 11,325. US stock index futures point to gains at the start of a new trading week.
The increasing optimism that Italy and the EU will finally reach a common ground on the budget issues pushes the euro higher today. But it’s too early to call a victory yet and bet on EURUSD rally as there are no details on the potential concessions by Rome. Depending on the exact measures that will be proposed by the government, the pair could target higher levels or lose its steam. Meanwhile, the ECB officials sound mixed today. Lautenschlager said that nothing on the horizon to change plans to end QE, while Praet pointed to very limited spillover from Italy “so far”, but highlighted a notable increase of downside risks in the region. The fundamentals in the euro zone are really worsening lately. In another sigh of this, Ifo data pointed to a lower than expected business climate index in Germany that came in at 102.0 versus the forecast of 102.3. But the euro remains on the offensive in the daily charts, mainly due to further rally in Italian bonds – 10-year yields hit near two-month lows. As such, EURUSD stays above the 1.1350 area but the upside impetus looks limited and a more sustainable ascent is unlikely at this stage. The key support still comes at 1.13.
GBPUSD is also recovering after a plunge on Friday. Now, when the EU officials approved the deal, focus turns to a meaningful vote in the UK parliament. Mays’ chances of winning this vote remain rather low, so the downside risks for sterling are still there. GBPUSD struggles to overcome the 1.2850 intermediate resistance on the way to the crucial 1.30 figure. Considering the remaining downside risks from Brexit developments, the pair’s local rallies should be viewed as selling opportunities for now. Only if investors make sure that London will avoid a no-deal divorce, the British currency will regain its attractiveness and could push substantially higher from the current levels. So far, the possibility of falling below 1.2750 remains.
USDJPY touched a ten-day high of 113.35 earlier in the day but was rejected from this level later, though the pair stays afloat marginally above the 113.00 level. The prevailing risk-on sentiment has dented the safe-haven yen demand. On the other hand, the dollar bulls are on the sidelines today nearly across the board, which caps the upside potential in the pair. The current tone looks rather neutral, and more sustainable gains are possible in case the current investor enthusiasm rises further. Ahead of the key US-China meeting at the Summit in Argentina, market participants will likely remain cautious, so the downside pressure on the Japanese yen will likely be limited.
Brent crude is making some recovery attempts but struggles to regain the $60 figure. Traders continue to worry about the potential supply glut amid the riding production globally and future signs of slowing demand growth. Ahead of the OPEC Summit, traders will remain nervous as there are doubts about the ability of the cartel and its allies to cut arrange the output cuts that would prevent another crisis in the market. Despite the oversold conditions, Brent could stay under pressure in the short term as OPEC producers keep silence ahead of the meeting due next week in Vienna.
Nathan Lambert, Head of Global FX Analytical Department