A sudden turn of events in the Brexit negotiations turned the tables for the European majors yesterday sending the Euro and the Pound higher and creating expectations for potentially more gains. The Dollar on the other hand shed some of its gains seen earlier in the week but today's ISM report will act as a prelude for tomorrow's NFP data release. Equities were in the red yesterday across the globe and this morning the European and US futures are pointing slightly lower.
The Pound shot 150 pips higher yesterday when a news story suggested that Germany and the UK are prepared to drop key Brexit demands and agree to a less detailed plan ahead of Britain's exit. The report was later denied by Germany that said that their stance has not changed pushing the Pound lower but the fact remains that there seems to be some progress in the negotiations. Further progress could put pressure on the amount of short positions against Sterling, that is at their highest level since 2017, and more positive headlines may squeeze short-sellers out of their trades propelling Cable higher. Currently, the Pound is trading around 1.29 and for more gains to come we need a clear break of the 1.30 and 1.3050 resistance barriers first.
The Euro also enjoyed a good session yesterday partly supported by the positive news around the Brexit negotiations while the easing of political risk in Italy also helps the currency find its footing. 10-year Italian bond yields have come off their recent highs and with several reassurances from the ruling coalition in Italy that EU's budget deficit rules will be respected investors' nervousness seems to subside. The key interim resistance for the Euro stands at 1.1650 and if the currency manages to overcome this then the path is clear towards the 1.17 area.
The Dollar has been soft during the past 48 hours even though the beginning of the week was promising for the US currency. Nevertheless, the key event for the greenback and the majors this week remains the Non-Farm Payrolls report on Friday and today's non-Manufacturing ISM reading will provide further data to traders looking to position themselves ahead of the NFPs. Traditionally, a strong ISM reading leads to a positive NFP report so if we see a bullish set of figures today we should see the Dollar picking up pace again; Dollar/Yen is the instrument to watch as fresh demand for the greenback should send prices towards the 111.80 highs again.
Commodities diverged yesterday with Gold capitalizing on Dollar's short-term lack of momentum while Oil proceeded lower. The yellow metal managed to hit the $1,200 level yesterday but its price action is strongly tied to Dollar's direction. Even though we've seen some weakness yesterday and the day before we're still looking for Dollar to pick up momentum, which would send Gold towards $1,190 again. Oil moved lower as the API data came out mixed and the spotlight now falls on the DOE Crude inventories release today; depending on how this prints we may see a further correction towards $67 or a reversal towards the $70 area.
Equities ended the day below water yesterday and this morning the Asian markets are trading with a bearish bias as well. The potential implementation of fresh US tariffs on Chinese goods scheduled to come in effect today re-escalates trade worries and the European and US futures are indicating a relatively bearish opening bell. Both the FTSE 100 and the DAX broke below key support levels yesterday and if they don't quickly reverse course to negate the breaks then more weakness may be the next step.
MARKET EVENTS TO WATCH
- US Initial Jobless Claims - 4.30pm
- US ISM Non-Manufacturing/Services - 6pm
- DOE U.S. Crude Oil Inventories - 7pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Market Research