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Rates: Falling oil prices pushed core bonds higher
Core bonds gained ground on Friday as tumbling oil prices weighed on investor sentiment. EMU PMI’s disappointed, giving German Bunds some extra tailwind. We expect a more neutral day for bonds today with an improvement in sentiment. Markets expect a decline of German IFO expectations to its 2018 low and ECB’s Draghi addresses European Parliament.

Currencies: euro to bottom as sentiment on risk shows tentative signs of improving?
The euro suffered on Friday from a poor EMU PMI and a fragile risk sentiment. This morning, sentiment on risk improves in Asia. FX traders will keep an eye the German IFO business confidence and a testimony of ECB’s Draghi before Parliament. We don’t expect his message to be that negative for the euro.

The Sunrise Headlines

• US equity markets ended in red on Friday. The Dow Jones underperformed, having recorded a -0.73% loss. Asian stocks are trading mixed. China switched gains for losses. Hong Kong and Korea outperform.
• Italy’s Deputy PM Salvini left the door open for altering the Italian budget proposal, suggesting it could well be 2.2% or 2.6% as long as it is a budget that stimulates the country’s economy to grow.
• Czech PM Babis survived a no-confidence vote on Friday. The opposition had called for such a vote because of alleged fraud with an EU project subsidy. Babis had 92 MP votes against him, while 101 are needed to oust the government.
• The Japanese manufacturing PMI slipped to a two-year low in November as the indicator fell from 52.9 to 51.8. Manufacturers reported a weaker demand – the first time since September 2016 – and saw new orders decrease.
• Brexit entered a new phase as EU-leaders officially signed off the deal on Sunday. Focus now shifts to British politics with the agreement coming into force only after it has been ratified by the British (and European) Parliament(s).
• The UN Security Council will hold an emergency meeting today after Russian warships opened fire on Ukrainian vessels in Russian claimed waters of the Black Sea. In response, Ukraine will ask parliament to approve a 60-day state of war.
• Today’s economic calendar provides markets with the US Chicago Fed (Oct) and Dallas Fed (Nov) sentiment indicators. The IFO-business indicator is due in Germany. ECB’s Nowotny, Coeuré, Praet and Draghi are scheduled to speak

Currencies: Euro To Bottom As Sentiment On Risk Shows Tentative Signs Of Improving?

Euro to bottom as global sentiment improves?

Euro weakness prevailed on Friday as the Nov. EMU PMI’s declined again faster than expected. Of late, markets questioned whether recent volatility would make the Fed more cautious to hike rates further next year. However, EMU data also raise questions whether the ECB will be able to raise rates. Sentiment on risk remained fragile and supported the dollar. Even the oil-price decline maybe was slightly USD supportive as it might ease US inflationary pressures. EUR/USD declined for most of the day and finished at 1.1337. USD/JPY closed the session little changed at 112.96. This morning, risk sentiment improves. The oil price decline is positive for several countries in Asia. The (trade-weighted) dollar is little changed (96.90 area). EUR/USD (1.1350) shows tentative signs of bottoming. The yen weakness (risk-on). USD/JPY is trading in the 113.20 area. FX-traders will keep a close eye at the German IFO business confidence today, in the wake of the poor PMI’s. ECB’s Praet will speak and ECB’s Draghi will testify before the European Parliament. We expect Draghi to mainly keep the assessment from the October meeting and ‘downplay’ recent signs of a slowdown. A constructive risk sentiment and modest optimism for Draghi might help a bottoming of the euro in daily perspective. Later this week, (FX) markets will closely monitor a speech of Fed’s Powell (Wednesday). At the end of the week, US president Trump and Chinese are expected to meet at the G20 meeting, discussing the US-China trade relations. Last week we had a neutral bias on EUR/USD. The pair is holding a sideways range between 1.1216 and 1.1621. In a short-term perspective, a further EUR/USD decline/rise of the dollar might be less evident. EUR/USD might regain some ground if sentiment or risk improves. Some progress in the US-China trade talks might be a euro positive, too. So, EUR/USD might drift a bit back north. However, for now we expect the 1.1621 resistance to hold.

The EU and the UK reached a Brexit divorce deal yesterday and agreed on a text on their formal relationship. Last week, sterling gained a few ticks in the run-up to the Sunday’s summit. Markets will now look how UK PM May will broker the deal in London to get Parliamentary approval. EUR/GBP will probably remain in a some kind of erratic trading patter near current levels as long as uncertainty remains as high as it is right now. The count-down to the Parliamentary vote, probably in about two weeks time, has started

EUR/USD: euro to bottom as sentiment on risk shows tentative sign of improving?

XAUUSD (1224.67): Gold prices settled near the support/resistance area of 1223.50. Price action is seen showing signs of exhaustion to the upside. This could potentially increase the risk of a decline to the minor support level of 1213.55. A reversal off this support level could once again revive the bullish momentum. However, failure to hold the declines could push gold prices lower to the next support level of 1204.08. To the upside, gold prices could still be aiming for the next resistance level at 1238.00.

GBPUSD (1.2814): The GBPUSD continues to remain volatile with price action seen consolidating around the support level of 1.2808. The lower support at 1.2683 remains untested which remains a risk to the downside. In the medium term, the GBPUSD is likely to stay range bound with the Brexit related news likely to push the currency pair around.

EURUSD (1.1344): The EURUSD currency pair has been consolidating within the range of 1.1435 - 1.1300. The attempt to test this resistance saw price action closing lower. We expect the EURUSD currently test the lower support area around 1.1315 - 1.1300. A reversal off this support level will mark a retest of the breakout from the falling price channel. A rebound in price action could mean that the euro could once again test the resistance level. A breakout from the resistance area is required for the common currency to post further gains.

The German GDP was confirmed to have declined 0.2% in the third quarter, data from Destatis showed on Friday. Flash manufacturing and services PMI were also weaker. The data suggested that there is a likelihood of a further slowdown in business activity in the Eurozone.

While the U.S. markets were quiet, Canada's monthly inflation jumped 0.3% beating estimates of a 0.1% increase. This partly reversed the 0.4% decline seen the month before. Core CPI advanced 0.4% after a flat print previously. Retail sales for Canada showed a 0.2% increase which was better than the estimates. Core retail sales, however, rose 0.1% missing estimates.

New Zealand's retail sales data released early Monday showed that the quarterly retail sales were flat for the third quarter. Core retail sales rose 0.4% on the quarter missing estimates of a 1.5% increase.

The EU summit was held in Brussels on Sunday. This follows last week's EU and the UK Brexit draft deal. EU leaders unanimously agreed to the Brexit deal. The UK needs to get a parliamentary approval on the agreement before finalizing the terms.

Looking ahead, the economic data today is relatively quiet. The German Ifo business climate report is due. This is followed later in the afternoon by ECB Draghi's speech followed the BoE Governor Carney.

EUR/USD

Current level - 1.1353

The bias is negative below 1.1360, for a dip to 1.1260 area and the latter should provide a base for another upswing, towards 1.1500 area.

USD/JPY

Current level - 113.19

The slide since 113.20 is over with the recent low at 112.60 and the bias is positive, for a rise towards 113.70.

GBP/USD

Current level - 1.2816

The failure to continue upwards signals a bearish bias, for a break through 1.2760, en route to 1.2660.

BoJ Governor Haruhiko Kuroda appeared in the Parliament again today. He clarified that the objective of the quantitative and qualitative easing problem was to lift inflation to 2% target, rather than bankrolling the government debt.

He also pointed out "how to deal with the BOJ's expanded balance sheet would be among key challenges for us when we were to exit from quantitative easing."

However, "past experience of other central banks indicate that with a good mix (of redemption and re-investment of bonds), it's possible to shrink our balance sheet at an appropriate pace, while keeping markets stable."

Euro is given a lift on reports that the Italian coalition is considering adjustment on its 2019 budget plan. Il Messaggero newspaper quoted Armando Siri, a Transport Ministry undersecretary saying that "In order to save the budget and avoid an increase in market turbulence ... a small fine-tuning (of the deficit target) could be considered."

Separately, it's reported that Deputy Prime Minister, leader of Five-Star Movement, Luigi Di Maio also said deficit target reduction is not a problem as long as budget measures remain the same. On Sunday, another Deputy Prime Minister, leader of the League, Matteo Salvini also said "no one is stuck" to the deficit target, hinting at some flexibility for adjustment.

The cabinet is expected to meet today in the evening to discuss reduction of the 2.4% deficit target of 2019. And that could open up the door for constructive dialogue with the European Commission to avoid Excessive Deficit Procedure.

Italian 10 year yield dips notably today and is down -0.191 at 3.223. German 10 year yield is currently up 0.028 at 0.372. That is, spread is now below 300 alarming level.

EURUSD had a deep fall on Friday and has been stuck below the 20-day simple moving average over the last couple of months. Looking at momentum indicators, the RSI is pointing slightly up below its neutral threshold of 50, while the MACD also remains innegative territory but is embraced by its red signal line.

In the wake of more negative pressures, the market could meet support at the 17-month low of 1.1215, before the price heads sharply lower towards the 1.1115 mark, identified by the lows on June 2017. In case of steeper declines, the pair could breach this trough, diving to 1.0830, reached on May 2017.

An upside recovery could jump above the 20- and 40-SMAs and challenge the 1.1500 strong psychological level, registered on November 7. Slightly above this region, the 23.6% Fibonacci retracement level of the downleg from 1.2475 to 1.1215, around 1.1530 could be next level to focus on, before touching the falling trend line.

Summarizing, the bearish picture in the long-term looks to last for a while longer as the world’s most traded currency pair – EURUSD – has been developing below the descending trend line since March of the current year.

Daily Pivots: (S1) 144.20; (P) 144.87; (R1) 145.39; More...

Intraday bias in GBP/JPY remain neutral first, and further decline is in favor as long as 145.99 minor resistance holds. On the downside, break of 144.02 will resume the fall from 149.48 and target 139.39/47 key support zone. On the upside, above 145.99 support turned resistance could bring stronger rebound. But near tem outlook will be neutral at best as long as 149.70 key resistance holds.

In the bigger picture, as long as 139.29 cluster support (50% retracement of 122.36 to 156.59 at 139.47) holds, up trend from 122.36 (2016 low) would still extend beyond 156.69 high. However, decisive break of 139.29/47 will suggest that such up trend is completed and turn outlook bearish. In that case, next target is 61.8% retracement at 135.43.