Currencies start the week facing a conundrum of factors that will drive price action over the next few days with both positive and negative catalysts poised to set the direction. In Europe, political risks like Italy's budget discussion and UK's Brexit progress dampen risk appetite threatening to send the European majors to new lows. In the US though, the agreement between President Trump and Canada's Prime Minister Trudeau on a deal that will replace the NAFTA agreement sends equity futures higher. Commodities ended the week with gains but should we expect more going forward?
Starting with Europe, Italy's troubles have resurfaced as the coalition government is putting the country's membership to the EU in risk by announcing a budget deficit goal of 2.4%. This is not above the EU's 3% limit but it spreads fresh uncertainty on whether Italy will become the next systemic risk for the Union. Any positive bias provided by Draghi's optimism on the progress of inflation seems to take the backseat for now and the Euro is trading just below the 1.16 mark. Last week we said that as long as the currency remains above 1.1650 a new leg higher was likely but now that this key interim support is broken it seems that the shared currency is more likely to travel towards the 1.1550 area before finding fresh demand.
The Pound was more resilient last week versus the Dollar and managed to stay above the 1.30 mark but it did penetrate the important 1.3050 support level. Brexit headlines remain the key catalyst for the UK currency and this week we have another important event: there's a Tories' party conference in the middle of the week and Theresa May will be delivering a speech there. The big risk for the Pound, apart from a hard Brexit of course, is May losing control of her administration and hardliners like Boris Johnson taking over. As long as the British PM remains in control the Pound should be able to avoid a collapse but with fresh data pending for release this week the path of least resistance points lower towards the 1.2950 area.
The Dollar steams higher on the back of Fed's rate hike decision, the agreement between the US and Canada on a new post-NAFTA deal and high hopes for another rate increase in December. Investors are pricing in a 72% chance of another move in 2.5 months driving the greenback higher and this could change only if fresh data starts deteriorating dramatically, which seems unlikely right now. This week the release of the ISM reports will provide fresh stimulus but with the Dollar in demand we should see fresh gains for Dollar/Yen with prices expected to trend towards the 114.50-70 highs.
Commodities rallied on Friday with Gold finding some support after exiting its previous sideways formation while Oil scored fresh gains. Gold succumbed to Dollar's pressure last week when the US currency moved higher on the back of Fed's decision and its price traded as low as $1,180; this hinted that the yellow metal has finally decided on a direction after several days of sideways price action. However, after Friday's correction higher, the $1,190 resistance is now a key barrier: if Gold manages to overcome it then we're looking at a return to the previous $1,190 - 1,200 trading range, otherwise fresh losses could be seen with $1,170 being the medium-term target. Oil has hit our $73-74 target on Friday as worries about tightening supply drove prices higher; however, an extension further to the upside is still possible as Oil could hit the $74.50 mark before correcting lower.
Equities ended September with a bearish bias on Friday with most markets closing below water. However, October seems to kick off on the right foot with bourses in the US expected to open higher on the back of Trump's deal with Canada's Trudeau on a new trade agreement that will include US, Canada and Mexico. The European markets are not joining the party yet with the FTSE 100 expected to open slightly lower but it's likely that as soon as London comes online the UK index may flip into positive territory.
MARKET EVENTS TO WATCH
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research