It’s a bright trading session in Europe on Wednesday, with leading indexes are rising strongly amid a generally buoyant investor sentiment globally after Asian markets shrugged off weak Chinese manufacturing PMI data. The last trading day in October is marked by a big bounce after a rebound on Wall Street overnight and due to strong earnings in Europe. At that, local investors continue to closely monitor developments between the EU and Italy. There are still no signs of relief on this front. Italy’s economy showed no growth in the third quarter. The report was followed by prime minister warnings that stagnation is the reason why the country should ignore the EU rules and stick to its initial budget plan. Against this backdrop, Italy’s FTSE MIB adds 0.46 per cent to 19,086, Britain’s FTSE 100 adds 1.47 per cent to 7,139, France’s CAC 40 rises by 2.18 per cent to 5,086, while German DAX 30 gains 1.37 per cent to 11,441. US stock index futures point to a higher open as well.
Dollar demand has abated somehow but a wider picture shows that the currency remains on the stronger side. The USD rally gas abated amid the recovery in risk sentiment, while positive US data and hawkish Fed still support the currency and prevent it from a deeper retreat. EURUSD refreshed mid-August lows in the 1.1330 area, still threatening the key 1.13 handle. The euro zone CPI came in higher than expected, at 1.1%. But the report failed to inspire dollar bulls as higher inflation is not welcomed by markets in the context of slower GDP growth in the region. Technically, the pair will be able to hold above the 1.13 support in the near term if the risk sentiment remains bright, but the downside risks for the euro are increasing.
GBPUSD slipped to mid-August low of 1.2695 and was rejected after another attempt to break below 1.27. So the 2018 lows at 1.2660 are getting closer and could be challenged on the combination of negative Brexit developments and strong dollar. Sterling has switched to a local recovery on Wednesday but remains on the defensive amid Brexit negotiation impasse ahead of the Bank of England’s Super Thursday. This event warrants some consolidation in the near term, so this year lows will likely remain in place. Buyers could get back into the game tomorrow if the central bank doesn’t disappoint. But remember that global risks and Brexit issues still warrant selling the pound on rallies.
USDJPY shifted into a consolidation mode after two days of strong gains. The pair is attempting to hold above the 113.00 level as rejection from it could open the way to a deeper technical correction. On the other hand, as the yen safe-haven demand has abated amid a spectacular recovery in the global shares, the downside risks for the pair are limited, at least for now. Despite some signs of the abating upside impetus, the pair is decently elevated in the weekly charts so far, and the dollar has a room for rally from the technical point of view. USDJPY will get further direction from the US employment report due on Friday. Strong jobs and wages numbers could spur further USD rally. Such a scenario warrants an ascent to fresh three-week highs.
Brent crude is making shallow recovery attempts. The price was rejected from daily highs above $77 and is now trading marginally higher on the day. Traders still lack reasons to buy as the Iranian factor has been priced in already, the US inventories keep rising, shale production remains robust, and top OPEC exporters are intending to keep increasing production in the months to come. In the short term, traders will focus on the EIA data. Should the report come less bearish than API estimates, Brent will be able to stay afloat. Otherwise, the barrel will get back below the $76 figure. In a wider picture, Brent remains vulnerable to downside risks.
Nathan Lambert, Head of Global FX Analytical Department