• Rates: Italian worries aren’t over yet
    The Italian/German 10-yr yield spread closed above 300 bps for the first time since June 2013. The new Italian budget proposal for 2020 and 2021 won’t bridge the gap between Italy and the EU. The Catalan independence urge resurfaces. German Bunds will probably remain in demand, outperforming US Treasuries. The US eco/event calendar heats up.
  • Currencies: EUR/USD downside test of 1.15/1.1525 support rejected, for now?
    Yesterday, the euro initially suffered from EU-Italian budget bickering. However, a test of intermediate downside support was rejected. Today, global sentiment on risk and the Italian budget debate will probably continue to outweigh the data as a driver for FX trading. Uncertainty on Italy isn’t over, but the euro has already discounted some bad news.

The Sunrise Headlines

  • US equity markets closed Tuesday’s session in red, with the exception of DOW JONES (+0.46%) closing at an all-time high. Asian markets are opening with losses. Japan is underperforming, while Chinese markets remain closed.
  • Italian media is reporting that the Italian government would be willing to (partly) give in to the EU by reducing its budget deficit to 2.0% in 2021, reversing plans to maintain the 2.4% deficit over the next three years.
  • UK PM May has presented a post-Brexit immigration proposal which focuses on workers’ skills rather than origin. The UK wants to attract the people with the skills that are needed. EU citizens will no longer have any preferential status.
  • Fed chairman Powell has defended the bank’s careful approach to rate hikes. He said rising wages do not suggest an overheating of the jobs market since the link between tight labour markets and inflation has been “greatly reduced”.
  • 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.
  • Catalan President Torra warned Spanish PM Sanchez that his pro-independence party won’t support Sanchez’s budget proposal in parliament unless he makes a proposal to head into the direction of independence for Catalonia.
  • Today’s eco calendar contains the ISM Non-Manufacturing and ADP employment report in the US and Retail Sales in the EMU for August. Multiple Fed governors speak today. German markets are closed for Unity Day

Currencies: EUR/USD Downside Test Of 1.15/1.1525 Support Rejected, For Now?

EUR/USD looking for a ST bottom?

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Yesterday, the dollar profited from an early session risk-off sentiment. Some EM currencies stayed under pressure and the euro was haunted by ongoing tensions between the EU and Italy on the countries 2019 budget proposal. EUR/USD extended losses as Europe sent Italy’s Tria home to redo the budget homework. Initially, Italian officials flexed muscles indicating that they wouldn’t give in to EU requests, but the tone eased later. Global sentiment improved slightly/temporarily as US traders joined, helping the euro to rebound off the intraday lows. EUR/USD set an intraday low just above 1.15, but finished at 1.1548 (from 1.1578). The USD/JPY rally also lost momentum. The pair closed the day at 113.65 (from 113.93). Overnight, Asian markets mostly remain in riskoff modus. EM currencies like the IDR and the INR are still fighting an uphill battle, amongst other factors due to the ongoing rise in oil prices. Mainland China and Korean markets are closed. Some more comforting headlines from Italian policy makers on the budget policy are easing pressure on the euro. EUR/USD trades in the 1.1585 area. Global uncertainty also blocks the recent USD/JPY ascent. The pair is drifting away from the 114 top (currently 113.71). Today, the eco calendar is moderately interesting with the final EMU PMI’s, the US ADP labour report and the Non-Manufacturing ISM. Preliminary EMU services PMI were better than the manufacturing indices. ADP job growth is expected to rebound to 184 000. The non-manufacturing ISM might ease slightly to 58. The data might be neutral to marginally USD supportive (ADP). However, global risk sentiment will remain the FX key driver. The jury is still out, but this morning’s price action suggests that tenisons on Italy might ease, at least temporarily. Maybe EUR/USD found at a ST bottom as the test of the 1.1500/1.1526 support was rejected. The USD/JPY shows signs of fatigue.

Yesterday, sterling initially held a negative bias as markets awaited the speech of Boris Johnson. He rejected May’s Chequers Brexit plan, but didn’t formally attack her leadership. Today, the UK services PMI is interesting, but the focus will be on May’s speech in Birmingham. EUR/GBP gained a few ticks this morning, but this was euro strength. Markets might consider that the EU and the UK will try to make some progress once the Tory conference is out of the way. This might at least temporarily ease the pressure on sterling

EUR/USD: downside test rejected, for now?

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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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