While the general tone in the global financial markets looks upbeat on Friday, the European stocks finish this week with steep losses amid the political turmoil in Italy. Italy's government set a target for the budget deficit at 2.4 percent of gross domestic product over the course of 2019-2021. Meanwhile, the European Parliament president Tajani expressed concern about the country’s budget plan. As s result, Italy’s FTSE MIB dropped 4.4 per cent and dragged other regional benchmarks lower. In particular, Britain’s FTSE 100 sheds 0.55 per cent to 7,503, France’s CAC 40 loses 1.31 per cent to 5,468, while German DAX 30 declines by 1.78 per cent as well, to 12,215. US stock index futures fall, with Dow set for the worst week in three month.
Dollar demand persists on Friday, with traders continue to digest “hawkish” signals from the Fed, while European issues – Italy and Brexit – add to the bullishness in the US currency. The turmoil in Italy set to escalate down the road as the EU officials will likely further criticize the country’s budget plan. This in turn should increase dollar attractiveness. EURUSD, which briefly rose above 1.18 at the start of this week, is extending the bearish move with the next target at 1.1525. This is the intermediate support on the way to the 1.15 threshold. The pair has registered a two-week low of 1.1570 earlier in the day. The downside pressure has intensified after a weak euro area CPI report. The core inflation declined from 1.0% to 0.9% in August vs. 1.1% expected. Interestingly, the dollar remains upbeat even as the US economic data came in lower than expected. The core PCE deflator for August was at 0.0% vs. 0.1% expected, while personal income increased by 0.3% vs. 0.4% expected.
GBPUSD slipped to two-week lows as well, getting closer to the 1.30 threshold. The pair touched a low of 1.3026 and remains on the defensive in the daily charts. In addition to stronger dollar, the pound suffers further decline due to dismal GDP numbers. The UK economy rose 1.2% in Q2 vs. 1.3% expected. Besides, no-deal Brexit fears continue to put pressure on sterling. However, market concerns look overdone as the two sides will likely strike a trade deal ultimately. If so, the pound will have a good bullish potential and could jump north on any signs of progress in “divorce” negotiations.
USDJPY refreshed 2018 highs at 113.64 earlier in the day but since then, the pair has retreated to opening levels as the Treasury yields started to decline. The dollar looks overbought at these levels and could correct lower should the current concerns over Italy spread across the global markets, or the US-China trade war gets back in focus. In the short term, the pair needs to stay above the 113.00 handle to confirm its bullish breakthrough. In case of a bearish correction, the greenback may receive an intermediate support in the 112.60-112.50 region.
Gold prices are making recovery attempts after a dip to mid-August lows below $1,181. The yellow metal is testing the $1,186 area that could open the way to $1,190 and then to the key $1.200 target. However, considering the ongoing buying pressure on the dollar, the current corrective potential looks limited, while the bearish risks persist. Market expectations of a rate hike by the Fed has cemented and even increased after the latest FOMC meeting, which is the key drag on the precious metal for now. Should the sellers reemerge, the price could challenge the $1,180 area early next week.
Nathan Lambert, Head of Global FX Analytical Department