Friday, October 19, 2018

European currencies sink as political risks weigh down on their outlook

Tags
  • Dollar
  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks

MORNING BRIEFING

The selloff in the Euro and the Pound extends as concerns about Italy's fiscal spending and UK's Brexit talks dampen currency traders' sentiment. The drama is expected to continue today as BoE Governor Carney will be speaking in public while market participants focus their attention on Italian bond yields. At the same time, the Dollar gains versus the commodity dollars while Oil stays below $70 as inventories grow.

The European majors stay in the red for yet another day with the Euro hitting 1.1450 overnight. Traders are concerned about the EU's response to the Italian 2019 budget draft after the European leaders labeled Rome's spending plans as “unprecedented” and requested that the 2.4% deficit goal is amended. With the shared currency having dropped more than 3% since the September 1.18 highs further losses may seem difficult to come. However, if the Euro fails to find support from the October 1.1430 lows and breaks below them, there's nothing to stop it from dropping all the way to 1.1320.

Regarding the Pound, the British currency moved further to the downside to come close to the 1.30 level. PM Theresa May seems willing to accept the extra one year extension to the Brexit transition period but her MPs are far from happy and there are rumors that some of them are even contemplating about siding with the opposition to force a second referendum. Clearly any speculators that piled on their long positions before this week's EU summit are now rushing to cut their losses short further pushing the Pound lower. However, with traders' positioning being heavily on the short side more losses may be hard to come at this stage. If we are proved wrong and 1.30 gives in, then the next area of support lies around the 1.2930 mark.

The Dollar was stable overnight which casts doubts on whether more gains may be seen from the greenback until the end of the week. With the European currencies already heavily oversold, attention falls on the commodity dollars and the Yen. The recent data from China indicated that the domestic economy grew at a slower pace in Q3 and this may weigh down on the AUD and NZD forcing them to revisit their monthly lows. In terms of the Yen, the equity markets seem to be pointing higher indicating an improved risk sentiment so we may see further gains to the upside as risk-off demand for the Japanese currency subsides.

Gold continues to consolidate around the same levels making an attempt to breach the $1,230 ceiling but the momentum is clearly diminished; with the Dollar expected to push higher and risk-off demand being almost absent the most likely scenario is that Gold will proceed lower to test the $1,215 support soon. Oil on the other hand extended its decline below the $69 level and with no technical or fundamental support seen on the horizon prices may retreat all the way to the $67 mark.

Equities are seen opening higher today with the European and US futures trending to the upside. Even though the political agenda in Europe and the US is filled with risks investors seem to be looking for bargains at the end of the week. The earnings season is progressing well and this improves risk sentiment for equity investors that view the recent losses as an opportunity to buy promising stocks at a discount and target a long-term return.

MARKET EVENTS TO WATCH

  • BOE Governor Carney Speaks in New York - 7.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research

 
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