Rates: Risk aversion to dominate trading?

Italian FM Tria returned from yesterday’s Eurogroup with work to do on the country’s draft budget proposal which is unacceptable to Europe. Italian populist party leaders probably won’t give in, adding selling pressure on BTP’s today amid an empty eco calendar. It could feed into risk sentiment and support core bonds.

Currencies: Italy-EMU budget dispute weighs on euro

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Yesterday, EUR/USD moved up and down driven by intraday swings in global sentiment. In the end, tensions on the Italian budget prevailed and this will probably remain the key feature today. EUR/USD is nearing the 1.1526 neckline. A break would worsen the technical picture. Sterling traders continue to keep an eye at the Birmingham Tory conference

The Sunrise Headlines

  • US equity markets opened the week on a positive note, with the exception of NASDAQ (-0.11%). Risk sentiment soured somewhat towards the end of trading which is also reflected on Asian equity markets this morning. China is closed.
  • France’s economy minister, Bruno Le Maire, among other Eurozone finance ministers, has warned Italy that they have to respect the EU budget rules. The EU has asked for more details on the budget proposal that targets a 2.4% deficit.
  • Northern Ireland’s DUP party leader Arlene Foster has said she would be happy to work with Boris Johnson as PM, putting pressure on Therese May. Johnson will speak today at day three of the Conservative Party conference.
  • The Reserve Bank of Australia kept its policy rates at a record low this morning despite strong growth, employment and inflation numbers. The bank warns for the impact of record high household debt on consumption and growth.
  • Ahead of next week’s IMF annual meeting, IMF Managing Director Christine Lagarde expressed her concerns over the health of the global economy. She said the IMF’s official economic forecasts have become less bright.
  • President of the Boston Fed Eric Rosengren, who will vote on the FOMC in 2019, has stated the Fed will likely need to move the policy rates gradually from “a mildly accommodative stance to a mildly restrictive stance”.
  • Today’s eco calendar is extremely thin, with no data from the US and only PPI data from the EMU for August. Bank of England’s Haldane chairs a panel in London today. Fed Powell, Quarles, Kaplan and ECB Villeroy speak as well

Currencies: Italy-EMU Budget Dispute Weighs On Euro

Euro under pressure as Italy stays in the spotlights

Yesterday, FX traders looked for guidance from global risk sentiment. The US-Canada trade deal but at the same time uncertainty on the Italian budget were the main ingredients for the swings in sentiment. Caution on Italy initially prevailed pushing EUR/USD to the 1.1570 area. Later, the euro felt some mild support as global markets turned more optimistic on trade after USMCA. However, after a good open of US equities, this optimism proved fragile, too. Negative comments from the EU on the Italian budget probably also capped any further euro gains. Eco data (decent US ISM) were only of second tier importance. EUR/USD closed at 1.1578. USD/JPY was hardly affected by lingering uncertainty and held near 114. Overnight, most Asian markets that are open, are trading in negative territory. Japan outperforms. Asian EM currencies like the IDR remain under pressure. The RBA as expected left its policy unchanged, keeps a balanced assessment and doesn’t signal a rate hike anytime soon. AUD/USD is drifting back to the 0.72 area, but that is probably due to global sentiment. Today, the eco calendar in Europe and the US is almost empty. So, global sentiment will continue to dominate FX trading. Italian Fin Min Tria returning home with a ‘no go’ from Europe on the budget will meet harsh talk from the Party leaders supporting the government. This might cause renewed pressure on Italian govies, European equities and weigh on the euro. If sentiment turns more negative globally, the dollar will probably also profit. Last week’s topside test in EUR/USD is rejected. 1.1526 is the neckline of a ST double top formation. A break would signal more trouble for the single currency and might open way to the 1.1301 correction low. The technical picture of USD/JPY is constructive, but we are reluctant on yen shorts. In case of a less positive global sentiment, selling pressure from EUR/JPY might start on weigh on this cross rate, too.

Yesterday, sterling initially traded in the defensive as headlines from the Tory party meeting on Brexit remained quite harsh. Later, the UK currency rebounded on press headlines/rumours that the government was preparing a new proposal on the Irish border issue. Today, the focus will remain on the Birmingham meeting. Markets will especially monitor the position of Boris Johnson. We stay cautious on sterling, but euro weakness might also weigh on EUR/GBP. The 0.8850 area is a first intermediate support

EUR/USD: Italy weighs on euro; 1.1526 neckline within reach

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