Last night's Powell-fuelled rally on Wall Street lost steam in Asia because of trade concerns, but European markets are trading higher on Thursday despite the uncertainty in the UK and Italy. Fed Governor has surprised investors with a more ‘dovish’ tone as he said that rated were ‘just below the neutral level’. Investors took it as a sign that the Federal Reserve may pause hikes in 2019, depending from the incoming economic data.
Meanwhile in Europe, the Italy’s Salvini highlighted that the government is not discussing cutting deficit target by more than 0.2%. Considering the current target stands at 2.4%, the country won’t be willing to move it lower than 2.2%. The European Commission will likely reject such a stance, so the threat of sanctions against the third-largest euro zone economy remains, which should cap investor optimism further. So far, Italy’s FTSE MIB adds 0.14 per cent to 19,142, Britain’s FTSE 100 gains 0.73 per cent to 7,055, France’s CAC 40 rises by 0.58 per cent to 5,012, while German DAX 30 gains 0.22 per cent to 11,323. US stock index futures look set to retrace yesterday’s gains ahead of FOMC minutes due later today.
The dollar is recovering loses against the European currencies while continues to bleed in the USDJPY pair as the Japanese yen demand is getting stronger ahead of the G20 Summit. Traders refrain from taking risks and prefer safe assets, including the yen and gold, while the buck is still digesting a ‘dovish’ tilt in Powell’s speech. However, it looks like markets overreact to the testament. First, the future rates path will be data-depended. Second, before the central bank reaches the so-called neutral range, there should be three to four hikes ahead. So the selling pressure on the buck will likely further ease, especially against the backdrop of European issues.
EURUSD faced a stiff resistance in the 1.14 region and was rejected from the psychological level, down to 1.1350. Apart from Italy, the bullishness of the single currency is capped by a cautious market stance ahead of G20 Summit and rising concerns about the slowing euro area economy. Interestingly, the pair turned negative on the day despite strong sentiment data in the region and the ‘dovish’ tone from Fed. In this context, today’s FOMC meting minutes will attract investor attention as further negative comments could fuel another sell-off in the USD and therefore cap euro’s loses.
USDJPY is grinding lower amid the market positioning ahead of the crucial Summit in Argentina. The pair was rejected from highs above 114.00 and reached a low of 113.20, where the intermediate support comes. The short-term outlook for USDJPY remains fairly bearish. Trump’s mention of auto tariffs, the upcoming Summit, the ongoing oil market rout, Europe’s problems and fears of slowing global growth all point to a potential for further yen strength as the risk-off environment may reemerge quickly. Technically, the pair could challenge the 113.00 support should global investors step up with profit taking in riskier assets.
Crude oil prices plunged to fresh lows below $58 and remain under an intense selling pressure. Brent tried to proceed with its gradual recovery on Wednesday, only to attract another sell-off. Such a behavior shows that traders refrain from buying ahead of G20 Summit and OPEC+ meeting as there is no guarantee that the producers will find a consensus and decide to resume production cuts. Russia’s unwillingness to limit output adds to uncertainty in the market. And the fact that oil fails to attract buyers despite the oversold conditions and interesting levels, confirms that the downside risks still prevail, and fresh long-term lows may be in the cards.
Nathan Lambert, Head of Global FX Analytical Department