So much for a quiet start of the week yesterday as the initial positive tone was substituted for a risk-off rally that saw currencies and equities push lower. The Euro and the Pound dropped lower almost in a synchronized manner as investors concerns about the political agenda weighed down on prices. Treasury yields declined while Gold is again pushing higher with Oil still stuck around $69.
The Euro started the day on a positive footing yesterday but nervousness around the European Union's response to Italy's budget draft forced the shared currency to retreat lower. The EU is expected to respond to Italy's draft today and all indications suggest that they will reject the plan that proposes a material increase in fiscal spending, violating the bloc's 2% budget deficit rules. This may push the Euro lower today as it will increase the pressure on Italian debt and it may drive prices towards the 1.14 area.
However, from a technical perspective we must note a clear divergence between prices and momentum and this suggests that a move to the upside should be expected soon. This may fall in line with the ECB meeting and rate decision later in the week when Mario Draghi is expected to reiterate his bullish view of the economy, discuss inflationary pressures and ultimately support the Euro. As such, we think that any losses today will likely be limited and short-lived and we may eventually see the Euro rising towards the 1.15 and 1.16 levels by the end of the week.
The Pound came under more pressure yesterday as rumors about Tories MPs challenging Theresa May were proven untrue but prices have already fallen to 1.2950. This retreat penetrated the bottom end of the ascending channel that kept the Pound supported since mid-August and it now poses the question whether a deeper correction is in the cards. This is a very light week in terms of fresh data from the UK and apart from a speech from BoE Governor Carney later today there's nothing in the calendar so the price action will be dictated by Brexit developments. Technically the Pound is supported around the 1.2930 area so unless we get any fresh bearish headlines today, we may see a pullback towards the 1.30 level over the next 24 hours.
Gold saw some weakness over the previous trading session that tested the $1,220 support area but overnight prices started picking up pace to the upside. Depending on Dollar's performance and the resurgence of any geopolitical risks, the yellow metal may travel towards the $1,234 resistance and this is where the major test is. A break above this will clear the path for a medium-term rally towards the $1,260 area, otherwise we should expect more consolidation between $1,220 and $1,230. Oil found some support ahead of the $68 area and the downwards momentum has clearly diminished but for a meaningful move higher we first need to see a penetration of the $70 resistance level.
Equities in Asia are trading with a bearish bias this morning as risk aversion re-emerges amid worries about the US-China relations while the political situation in Europe doesn't help much. Futures in Europe and the US are already trending to the downside with all the markets expected to open at least 1% lower today. This may be a fresh twist in the recent equities' weakness we noticed earlier in the month so we should remain on the defensive and see how low we can go today.
MARKET EVENTS TO WATCH
- Euro-Zone Consumer Confidence - 6pm
- BOE's Carney Speaks at a Conference - 7.20pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research