Volatility remains elevated in the currency markets for a second day in a row with the European majors pulling higher and the Dollar taking a backseat - but will this last? The Euro and the Pound took advantage of Dollar's respite and came off their lows yesterday even though we saw no fresh data to support their recovery while the Dollar/Yen still traded around the 113 mark. Equities had a marginally positive day especially in Europe while commodities spent the day around the same levels indicating a lack of fresh catalysts.
Starting with the Euro, the shared currency managed to climb back above the 1.15 level after dipping below 1.1450 during yesterday's session. Promising comments from Italy and a retreat from Dollar's side allowed the Single currency to move higher: Italian Economy Minister Tria reassured investors that his administration will bring their budget deficit back near the 2% target and that they will make sure that Italian yields will not rally out of control. Even though this might provide a short-term relief to Euro we believe that Italy's troubles are far from over and Tria's promises will do little to change the bias given that the coalition government seems committed to increase fiscal spending. Should they stay true to their word, Italian bond yields will keep pushing higher and this will continue to take a toll on the shared currency's outlook. As such, any rally higher for the Euro should not last long; the technical resistance at 1.1550-80 should cap any gains and depending on how the US inflation data prints tomorrow, another leg lower may be seen.
The Pound was also among the major gainers of yesterday's session with Cable hitting 1.3150 to break above last week's highs. There's a lot of speculation - or hopes should we say - that the European Union's proposal to the UK regarding a post-Brexit trade deal, expected to be published today, will be a step forward in the negotiations. Although we've heard a few positive comments from both sides, this is all talk and given the lack of any concrete evidence we'd have to say that the risk for the Pound today still lies to the downside. If the new proposal is nothing new, and with time running out to reach an agreement, the Pound will shed its gains and travel towards 1.30 again. On the flip side, if a positive surprise takes place and we see the EU and the UK finding common ground then Sterling will surge with 1.33 the next target. Fresh production and GDP data will also be released today but given the importance of the Brexit-related news, these figures will not affect the price action too much.
The Dollar saw a mild correction yesterday with Treasury yields pushing lower after reaching a 9-year high. The US currency remained largely unchanged against the Yen but lost ground versus the European currencies - as discussed above - but also against the commodity dollars. However, we still remain of the view that the greenback will stay in demand and that fresh data holds the key for another move to the upside. Today, the Producer Prices report will be released and a positive reading will act as a bellwether for tomorrow's inflation figures; if the CPI report comes in stronger than last month's, as analysts expect, the Dollar will again be in demand as a higher inflation reading will increase the odds of the Fed raising rates faster next year.
Commodities spent the past 24 hours trading sideways with Gold oscillating between $1,185 and $1,190 while Oil managed to hit $75 again. For the yellow metal, Dollar's data will dictate the price action and another round of positive figures will push prices towards the bottom end of its broader sideways formation with $1,180 being the short-term target. Oil on the other hand tries to build fresh momentum to continue moving higher; from a technical perspective, as long as prices don't correct below $73 then the upside still looks likely.
Finally a positive day for equities almost around the globe yesterday with the European markets ending the day above water while the US bourses were only marginally in the red. This morning though, futures on both sides of the pond are trending higher indicating that after a few days of losses traders are looking for bargains given the continued positive growth of the US economy. However, the earnings' season is just outside our door and it will be interesting to see whether US growth will translate into strong figures - and more importantly, equally strong forward guidance. If not, then things could turn ugly in a hurry.
MARKET EVENTS TO WATCH
- UK Industrial Production - 12.30pm
- UK Manufacturing Production - 12.30pm
- UK Gross Domestic Product - 12.30pm
- US Producer Price Index - 4.30pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research