A deepening political crisis in Italy has fuelled a sell-off in the global financial markets this week. The widespread risk aversion has intensified on Tuesday, as investors fear that new elections will question the membership of Italy in the currency block. Against this background, Italy’s MIB loses 2.6 per cent after yesterday’s plunge by 2 per cent. Meanwhile, Britain’s FTSE 100 sheds 1.20 per cent to 7,630, France’s CAC 40 declines by 1.48 per cent to 5,427, while German DAX 30 loses 1.34 per cent to 12,691. US stock futures show that Wall Street would open lower amid the overall negative sentiment in the markets.
EURUSD has accelerated the downtrend and dropped to 10-month lows marginally above the 1.15 milestone amid the dollar’s strength and the political turmoil in the third-largest euro zone economy. Thе latter has not only reignited euro break-up fears, but also pushed ECB rate hike expectations dramatically lower. Early this year, the market was pricing in three hikes in 2019, while now investors expect only one hike which is even in question. The gloomy picture is exacerbated by dismal economic figures from the euro area this year, which coupled with political tensions in Italy and Spain, may fuel concerns over a potential crisis in the region. Against this backdrop, the euro looks extremely vulnerable to further losses, especially in contrast with a healthy growth in the US. From the technical point of view, the pair may well accelerate the decline, should the 1.15 barrier give up.
GBPUSD follows the downward path as well. The pound plunged to November lows just above 1.32 and remains under intense bearish pressure. The pair has partially bounced from lows but stays on the bearish path. The pair is further undermined by political jitters in Europe which put high-yield assets under pressure, including the sterling. The additional negative tone is fuelled by lingering Brexit uncertainty as no trade deal in sight. The local rebound will hardly extend much further, considering the persistent bearish factors for the pound coupled with dollar’s optimism ahead of this week’s key economic releases which include GDP, CPI and employment data. The bearish pressure will ease somehow, once the pair recovers above 1.33, where the 20-hour SMA lies.
USDJPY continues to retreat from highs as widespread risk aversion adds to the bullish pressure on the Japanese currency. Should the political drama calm down a bit in the coming days, the pair will be able to resume the ascent, especially in case the US data come in on a stronger side. The price dropped to five-week lows around 108.40 and bounced partially as the panic in financial markets has eased somehow for the moment. On the other hand, if the risk-off sentiment intensifies again, the pair may well go below the 107.75 support area. In this case, the technical picture will worsen significantly.
Brent crude managed to hold above the $75 mark and found some bids close to the psychological level. The price has rebounded above $76 and turned green on the day. Despite the local pullback, the market still looks vulnerable as concerns over OPEC output increase still persist. The current recovery is more of a technical nature, while short-term risks remain in place, despite the overall fundamental picture in the industry looks quite healthy, especially amid the expected decline in the crude oil output in Iran and Venezuela. The API report is due Wednesday duу to yesterday’s public holiday in the US. In the short-term, Brent needs to confirm a break above $76. Otherwise, the price risks resuming the recent sell-off.
Gold quickly touched the key 200-DMA around $1,306 but struggled to break the barrier once again, despite the risk-off environment is supportive for high-yield precious metal. So, the price continues to oscillate around the $1,300 mark, struggling for direction amid the counteractive factors. On the one hand, risk aversion in the global markets supports demand for the safe haven gold, on the other hand, the dollar remains on the offensive, and this driver looks somehow stronger recently. Therefore, the bullish potential for the precious metal is limited as long as the price remains below the important 100-DMA at $1,325.
Nathan Lambert, Head of Global FX Analytical Departament