A new month kicked off yesterday but again it's the Dollar that leads the gains with investors looking towards the safety of the US currency as the political agenda in Europe never seems to ease. The Euro and the Pound are both under pressure this morning for different reasons, pointing towards a coordinated risk-off sentiment that sends equity futures south as well. Commodities on the other hand look brighter with Oil and Gold moving to the upside.
Starting our review with the Euro, the shared currency continues on its downwards trajectory bullied by Dollar's momentum and market participants' worries about Italy and the risk it poses to Eurozone's stability. After the coalition government announced that they intend to increase their domestic spending, which will bring their deficit to 2.4%, there's speculation that Italy's sovereign rating will be downgraded. Such a development will only add further pressure on Italian assets and send bond yields to new highs, which doesn't bode well for the Euro. There's a strong technical support located around the 1.1520 area but if it gets penetrated there's nothing to stop prices from falling all the way to 1.14.
The Pound spiked higher for a brief period of time yesterday when a rumor that the UK is prepared to make a concession regarding the Irish border issue hit the wires. However, the story was quickly dismissed and Sterling is again threatening to break below the 1.30 marker this morning. The Tories' party conference is under way and PM May will deliver her speech tomorrow but unless she provides some new, concrete evidence of negotiations moving forward the bearish bias on the Pound will persist. As long as we trade below 1.3050, the next area of focus for the UK currency is located around the 1.2950 level.
Commodities pushed higher in a coordinated manner yesterday even though the Dollar is on the rise against all of its peers. Gold seems to have encountered new-found demand after breaking to the downside last week and carved a higher low during yesterday's session. This morning prices are trending higher challenging the $1,195 resistance where the 200-period moving average is also found; this is a key level for Gold as a break above will open the door for a return to the $1,200 area while a rejection will again drive prices towards last week's lows. Oil powers ahead and after spending a day around the $73 area it has now almost hit $76. Even though the bias is in favor of the black gold we need to be mindful of overbought conditions that might trigger a correction at some point.
Equities on the other hand seem to have lost momentum early in the week after a day that ended mixed for the US and European markets. This morning the Asian bourses are mixed while equity futures on both sides of the Atlantic point towards a marginally bearish opening bell. At a time when Europe is still tangled in political issues, with Italy's budget deficit and the Brexit talks the major ones, the IMF has warned that they are worried about global growth. IMF chief Christine Lagarde signaled that they will cut their growth forecasts next week in the face of escalating trade disputes, which seems to be the main reason behind the bearish bias seen in the markets this morning.
MARKET EVENTS TO WATCH
- UK Construction PMI - 12.30pm
- Fed's Chairman Powell Speaks at NABE Conference in Boston - 8pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research