Optimism quickly turned to disappointment at the end of last week with the European majors turning lower on the back of fresh Brexit news and softer data. Both the Euro and the Pound start the new week on the back foot while the Dollar may also under-perform ahead of the Fed meeting on Wednesday. Equities are expected to kick off trading in the red while Gold also collapsed $15 to drop below $1,200 again. Oil is on the rise though attempting to consolidate gains above the $70 area.
The Pound starts the week on the defensive after having the worse day in some time on Friday following Theresa May's public address. The meeting in Salzburg didn't go as planned for the British Prime Minister as the EU leaders rejected her Chequers plan and it is now clear that there has been little to no progress in recent months as the Irish border and the economic relationship with the Union remain the unsolved issues. Theresa May said on her address on Friday that “no deal is better than a bad deal” and bets in favor of a hard Brexit are mounting again. The Pound drops to 1.3050 and further downside is likely; if Sterling drops below this significant support then the 1.2950 area will be our next area of focus.
The Euro is on a similar downbeat note this morning having come off its 1.18 highs to trade marginally below 1.1750. Softer than expected PMI data on Friday forced speculators to take some profits off the table as the shared currency hit a 2-month high at 1.18 and today we may see a deeper correction. The German IFO Survey is due to be released early in the afternoon and the weakness seen in the manufacturing sector is likely to affect the figures. A dovish printing of the business sentiment report will push the Euro lower and the levels to keep an eye on are the 1.17 and 1.1650 areas. At the same time, Mario Draghi will be speaking in Brussels later in the day but his comments will not likely help the Euro that seems due for a correction after a significant rally earlier in September.
The Dollar will also be at the forefront this week with the Fed preparing to deliver their third rate hike this year on the back of the robust domestic market performance and the tightening labor conditions. However, recent signs of weakness in some business sectors and the continued trade-related uncertainty may see the Fed taking a break after the rate increase this week. Clearly it's too early for them to make up their mind regarding a December move but depending on how bullish Jerome Powell will sound during his press conference, traders may speculate that the Fed will take a slower approach. Should this be the case the Dollar will pull back after the rate hike but in any case we're expecting the US currency to trade in a choppy manner going into the Fed event with a slight bias to the downside.
Commodities again traveled in different directions on Friday with Gold dropping lower while Oil continued posting new highs. For the yellow metal, Friday was a difficult day with prices coming off their $1,210 highs as expected, confirming that Gold trades sideways within the broader $1,190 - $1,210 range we've highlighted. Oil on the other hand is pushing above $72 this morning and the bullish bias seen in recent weeks remains strong; if prices manage to stay above the $71.50 resistance then an extension towards $73 seems likely.
Equities ended last week mostly in the green with the European markets closing above water and their US counterparties mixed. This morning though the bias seems to have turned south with futures in Europe and the US pointing towards a bearish start of the week. The implementation of President Trump's tariffs and the Chinese reaction to cancel talks in the face of the US President's decision should force investors come to grip with reality. However, whether this will take a meaningful toll on the upwards trend in place or will only trigger a short-term correction remains to be seen.
MARKET EVENTS TO WATCH
- German IFO Current Assessment - 12pm
- ECB's Draghi Speaks at ECON Committee Meeting in Brussels - 5pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research