European stocks were lower on Monday as investors brace for a volatile week with a number of major events, from a new round of US-China trade talks to the Fed’s policy meeting. Ahead of Tuesday’s vote on Theresa May’s revised Brexit deal, there is a growing sense in the markets that there will be a delay in the country’s leaving date, which it turn further eases fears of a no-deal Brexit and thus gives some support to the riskier assets in general. On the other hand, there is still some uncertainty around the divorce that makes the pound retreat from the recent highs. As such, Britain’s FTSE 100 loses 0.54 per cent to 6,772, France’s CAC 40 declines by 0.61 per cent to 4896, while German DAX 30 sheds 0.41 per cent to 11,235. US stock index futures look soft before the opening bell after Caterpillar reported weaker-than expected earnings in the fourth quarter, with the industrial giant shares fell by more than 5% after the report.
The dollar is mixed today after a steep decline against majors on Friday. The reports that the Federal Reserve might end balance sheet reduction soon. Coupled with the recent more ‘dovish’ signals from the central bank, these speculations further point to a pause in the tightening cycle which makes the buck lose its appeal. In other news, the US suspended the government shutdown but is failed to give a relief to the greenback as Trump said another shutdown could happen in three weeks without a border wall deal. Moreover, traders brace for the upcoming two-day Fed policy meeting that concludes on Wednesday and don’t rush to buy the USD as a more cautious tone is widely expected from the central bank.
EURUSD has settled above 1.14 after aи aggressive rally on Friday and retains the bullish bias today. However, the pair is yet to confirm its upside break as the euro remains vulnerable as long as it stays below the 1.15 figure. ‘Dovish’ Fed expectations underpin the common currency at this stage. On the other hand, traders could proceed to a partial profit-taking after Mario Draghi’s testimony before the European Parliament Economic and Monetary Affairs Committee. Should the ECB President confirm his concerns over economy, the euro’s bullishness will fade somehow. A daily close above the 1.14 handle is needed for a confirmation of the recent recovery.
The pound is correcting lower on Monday from fresh mid-October highs above the 1.32 barrier. It’s not surprising that traders prefer to take profit. First, the levels are very attractive, second, the uncertainty is growing ahead of the vote in Parliament on Tuesday as it remains unclear what amendments members will vote on. Amendments could put Brexit on hold or force new negotiations. The key driver behind the general strength in the cable is the fact that the scenario of a hard Brexit seems to be out of play now. Should the prime Minister lose the vote once again, May risks losing control of Brexit, which is a risk for sterling. Should the downside risks reemerge, the cable could challenge the 200-DMA below the 1.31 figure.
Brent crude is on the defensive at the start of a new trading week as supply-demand concerns are back at the forefront. On the one hand, another portion of disappointing Chinese data increase worries about the slowing oil demand from the world’s second-largest economy. On the other hand, oversupply concerns are rising along with the recovery in the US drilling activity which could be a sign of further increase in the crude oil production in the country. Additionally, uncertainty ahead of the US-China trade talks makes oil traders stay cautious. As such, the bearish risks are prevailing in the short term for Brent as the price fails to settle above the $61 handle. So the $60 support remains at risk and could be broken again should the risk sentiment worsen further.
Nathan Lambert, Head of Global FX Analytical Department