The spotlight falls on Europe today with major news and reports coming our way which bring the European currencies to the forefront. Optimism regarding Italy's budget deficit target and Theresa May's speech that will conclude her party's conference later in the day will dictate the price action for the two European majors while the Non-Manufacturing ISM report will provide fresh momentum to the Dollar. Equities ended the day in the red yesterday and this morning futures are indicating a mixed opening bell.
The Euro manages to recover overnight after hitting 1.15 yesterday on the back of Italy's fiscal plans that threatened to derail its European future. However, news that came in yesterday indicates that the coalition government has decided to reduce its budget deficit to 2% in 2021 in order to fall in line with EU's limits. This news somewhat alleviates worries about Italy reaching a point of no return and instead sends a message that some extra spending is needed for the next 2 years but then things will return to - almost - normal.
Clearly this is a more EU-friendly stance which explains why the shared currency rallied to 1.16 but the question is whether more gains should be expected. If this news is confirmed during the course of the week, the Euro will benefit: not only by investors looking to buy the currency at a low price with a longer-term perspective but also by the bears that will look to exit their shorts and take profits off the table. Should this be the case, then we'll be looking for the Euro to return to the 1.1650 area which will be our short-term target.
The Pound also managed to come off its lows overnight as the Dollar took a moment of pause allowing its peers to catch their breaths. The key event of the day is undoubtedly the Tories' party conference and PM May's speech. BBC reports that May will try to deliver an optimistic view of the domestic economy after the departure from the EU but it seems doubtful that the Pound will react to May's wishful thinking. The bias remains bearish at this point and if the Services PMI report scheduled for release later today prints lower as predicted then Sterling will likely travel south to retest yesterday's lows.
The Dollar eased off its rally over the past 24 hours without any significant reason which suggests that this is only a brief respite. Fed Chairman Jerome Powell reiterated his bullish view over the US economy's progress making a special reference to the robust wage growth which continues to underpin Fed's rate hiking agenda. Keep in mind though that the US Non-Manufacturing ISM data is pending for release today and if we see a lower reading, as expected, then the greenback might extend its short-term pullback. Dollar/Yen is trading around the 113.80 and a deeper correction may see prices trending towards the 113 support area.
Gold spiked higher yesterday to confirm that the lack of a broader direction remains the key trait of the instrument in recent weeks. Prices had come off the $1,180 area negating last week's bearish break and yesterday fresh demand combined with Dollar's short-term retreat allowed the yellow metal to rally all the way to $1,205. A round of softer US data today will likely allow Gold to extend its move towards the $1,210 resistance mark. Oil seems to have found a near-term top around the $75 area and spent the day trading sideways; the bias remains bullish but overbought conditions might trigger a short-term correction towards the $74 mark.
Equities had another day below water in Europe and the US yesterday while the Asian markets are trading without a clear direction this morning. It seems that the IMF's warning about global growth has taken its toll on investors' appetite so futures on either side of the Atlantic are pointing towards a mixed opening. London, France and Spain are about to open marginally higher while Germany and Italy will kick off in negative territory. The US markets are expected to open mostly higher but we should be in for a choppy trading day.
MARKET EVENTS TO WATCH
- UK Services PMI - 12.30pm
- Euro-Zone Retail Sales - 1pm
- ISM Non-Manufacturing/Services PMI - 6pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research