At the start of September investors will focus on the European majors with Italian finances and Brexit talks poised to dictate price action for the Euro and the Pound. Friday saw both European currencies turning lower and the question now becomes whether the higher risk currencies can resume their recent rallies or whether the Dollar will stage a broader correction. Stocks ended last week in the red and the first trading day of the week seems to point lower as well as market participants are expecting progress in the US-China trade negotiations.
Starting with the Euro, the shared currency is trading just above the 1.16 mark at the start of the week following Italy's outlook cut by Fitch on Friday. Clearly investors are growing nervous that Europe's fourth strongest economy could go down a path that would threaten its fiscal stability and possibly its European future if budget spending is increased beyond reason. Furthermore, with fresh Eurozone PMIs also pending for release over the next few days, traders will look to gauge whether the Euro can hold above 1.16; currently, the short term bias is bearish and the downwards move could go all the way towards the 1.1550 support.
The Pound is similarly trading with a downbeat tone testing the 1.2900 area and progress in the Brexit negotiations is not encouraging. British PM Theresa May ruled out a second referendum on Brexit and EU's chief negotiator Michel Barnier said he's opposed to a divorce blueprint that would keep economic ties with the Union in place. The momentum for the Pound is pointing lower and even though we saw a relief rally over the past couple of weeks, these gains are now under threat. The interim support for Sterling lies around the 1.28 mark which is close to 50% of the previous rally and with UK PMIs expected to print weaker at the start of the week we may see a deeper correction for the Pound over the next 48 hours.
Commodities were on a similar course at the end of last week with both Gold and Oil coming under pressure on Friday. Gold's outlook has improved considerably over the past 2 weeks but the question now becomes whether the yellow metal can break above the $1,215 highs. In the short term, Gold is trading on either side of the $1,200 figure and we need a meaningful move to dictate direction; $1,195 and $1,210 are the interim support and resistance levels. Oil has traded above $70 but its rally has now stalled; nevertheless, the broader outlook points higher and a move above Thursday's highs can propel prices towards the $72.50 area.
Equities ended last week on a bearish note and this morning the Asian markets are trading below water ahead of the US Labor day holiday. The European and US futures are currently mixed indicating that investors are unsure what to expect from the US/China talks while Italy's fiscal issues are not painting a nice picture across the pond. Having said that, it will be interesting to see whether the rallies in the US indices will pull their European counterparties higher this week or whether the US markets will turn lower as investors will look to bank some profits.
MARKET EVENTS TO WATCH
- Eurozone Manufacturing PMI - 12.00 pm
- UK Manufacturing PMI - 12.30pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Market Research