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Global core bonds gain ground today as earlier losses were paired throughout the day. Italian budget perils remained today’s main risk driver. BTP futures continued Friday’s rally when EU Commissioner Moscovici was surprisingly upbeat and rating agency Moody’s downgraded Italy’s rating by one step to Baa3, avoiding junk territory and changed its outlook to ‘stable’. Italian spread lowered back south of 300 bps. Other European debt paper followed. However, the move didn’t last today. Italian government responded to EU concerns saying it won’t alter its 2019 budget but will reconsider if slower-than-expected economic growth would weigh on revenues. At noon, intra-day gains of BTP’s were paired. With lack of economic data, German bunds were mainly driven by Italian news and mirrored the BTP’s. Earlier losses didn’t hold and Bunds are now even recording gains. Bundesbank said German growth likely slowed down in Q3 as carmakers struggle with a switch to new emissions testing. US Treasuries opened steady with an upward trend afterwards. President Trump signaled he might abandon a key nuclear arms-control pact with Russia, but that had little impact on Treasuries. The US yield curve bull flattens with changes ranging from -0.4 bps (2-yr) and -1.0 bps (30-yr). German yield curve edges lower with changes between -1.4 bps (2-yr) and -1.7 bps (5-yr). European spreads over Germany are currently little changed.

The Italian BTP rally on Friday following EU Commissioner Moscovici’s conciliatory language also created spill overs for the common currency. The euro was keen to continue its upward trend today. However, despite a moderate risk on environment, momentum soon stalled as investors pondered whether Friday’s move hasn’t gone too far too fast. After hitting an intraday high at 1.55, things went awry for EUR/USD, reversing the trend and following Italian bonds’ downtrend in lockstep. Investors probably also stack dollars rather than euros ahead of this week’s material events (EC approval or rejection of the Italian budget, EMU PMI’s, ECB decision …). EUR/USD is currently filling bids at the 1.147 zone. USD/JPY does manage to gain some ground, trading higher in the 112.75 area.

In an attempt to break the stalemate, PM May’s brexit team cracked open a door over the weekend to an indefinite transition period as an alternative to the EU’s backstop. That would keep the whole of the UK tied to the EU customs union and would render a solution for the Irish border issue redundant. This is indeed an option EU chief negotiator Barnier has offered multiple times. While this concession has the potential to unlock negotiations abroad, it remains to be seen whether such an indefinite transition period would ever pass the UK Parliament. The political uncertainty weighed on the pound today. The Northern Irish DUP expressing support for amendments to Northern Ireland legislation that would make the EU backstop illegal added more fuel to the fire, as did rumors about a ‘centrist’ Tory MP saying he would send a letter of no confidence in PM May. EUR/GBP trended north, nesting comfortably in the 0.885-area as markets await PM May’s speech before Parliament later this afternoon. Cable dipped below the 1.30-handle.

News Headlines

The Bundesbank signaled Germany’s Q3 growth might come to a temporary halt, suggesting the first quarter without expansion in more than 3 years. The economy has been losing momentum since global trade protectionism influenced its export-oriented economy and difficulties for its car industry adapting to new emissions testing.

Argentina’s new central bank governor, Guido Sandleris, has declared it was “definitely too soon” to say whether stability had returned to the country. The peso slid dramatically this year and the IMF had to grant an emergency loan of more than $50 billion. He warned emerging markets for rising global interest rates and a possible US-China trade war.

Daily Pivots: (S1) 0.8781; (P) 0.8808; (R1) 0.8840; More...

EUR/GBP's rebound from 0.8722 extended higher today. The break of 0.8847 resistance suggests that whole fall from 0.9097 might be completed already. Intraday bias is back on the upside. Break of 38.2% retracement of 0.9097 to 0.8722 at 0.8865 will pave the way to 61.8% retracement at 0.8954 and above. On the downside, however, break of 0.8801 minor support will turn bias back to the downside for 0.8722 and possibly below.

In the bigger picture, EUR/GBP is seen as staying in long term range pattern started at 0.9304 (2016 high). Current development suggests that fall from 0.9303, as a down leg in the pattern, is still in progress. But in case of deeper fall, downside should be contained by 0.8116 cluster support, 50% retracement of 0.6935 (2015 low) to 0.9304 at 0.8120, to bring rebound. On the upside, break of 0.9097 will target 0.9304 resistance instead.

Daily Pivots: (S1) 146.28; (P) 146.77; (R1) 147.53; More...

GBP/JPY's was rejected by 4 hour 55 EMA and intraday bias is turned neutral first. As long as 145.67 resistance turned support holds, price actions from 149.70 are still viewed as a correction. Above 147.57 will turn bias back to the upside again for 149.70. Break of 149.70 will confirm resumption of whole rise from 139.88. However, firm break of 145.67 will suggest that the rebound from 139.88 has completed and turn near term outlook bearish again.

In the bigger picture, current development suggests that GBP/JPY has successfully defended 139.29 cluster support (50% retracement of 122.36 to 156.59 at 139.47). And, the rally from 122.36 (2016 low) is still intact. Such medium to long term rise would extend through 156.96 high. This will now be the preferred case as long as 145.67 near term support holds. However, break of 145.67 will turn focus back to 139.29/47 key support zone.

Daily Pivots: (S1) 1.1454; (P) 1.1494; (R1) 1.1556; More....

EUR/USD weakens notably after hitting 4 hour 55 EMA. But it's staying above 1.1431 support. Intraday bias remains neutral first. Also, near term outlook will still remain mildly bearish as long as 1.1621 resistance holds. On the downside, break of 1.1431 will resume the fall form 1.1814 to retest 1.1300 low. Nonetheless, break of 1.1621 will turn focus back to 1.1814 instead.

In the bigger picture, corrective pattern from 1.1300 could have completed at 1.1814 after hitting 38.2% retracement of 1.2555 to 1.1300 at 1.1779. Decisive break of 1.1300 will resume the down trend from 1.2555 to 61.8% retracement of 1.0339 (2017 low) to 1.2555 at 1.1186 next. Sustained break there will pave the way to retest 1.0339. On the upside, break of 1.1814 will delay the bearish case and extend the correction from 1.1300 with another rise before completion.

Daily Pivots: (S1) 0.9948; (P) 0.9963; (R1) 0.9978; More...

Despite edging higher to 0.9980, upside momentum in USD/CHF remains weak with 4 hour MACD staying below signal line. Intraday bias remains neutral first. As long as 0.9848 support holds, further rise is expected. Above 0.9980 will extend the rally from 0.9541 to 1.0067 key resistance. However, considering bearish divergence condition in 4 hour MACD, break of 0.9848 will indicate reversal and turn outlook bearish.

In the bigger picture, the pullback from 1.0067 has completed at 0.9541 already. And rise from 0.9186 is likely resuming. Firm break of 1.0067 will pave the way to retest 1.0342 key resistance. We'd be cautious on strong resistance from there to limit upside to bring another medium term fall to extend long term range trading.

Daily Pivots: (S1) 112.23; (P) 112.44(R1) 112.74; More..

Intraday bias in USD/JPY remains on the upside as rebound from 111.62 is in progress. Further rise would be seen to retest 114.54 resistance. On the downside, break of 111.94 minor support will resume the correction from 114.54 to 38.2% retracement of 104.62 to 114.54 at 110.75. We'll look for bottoming signal above 109.76 key support in that case.

In the bigger picture, corrective fall from 118.65 (2016 high) should have completed with three waves down to 104.62. Decisive break of 114.73 resistance will likely resume whole rally from 98.97 (2016 low) to 100% projection of 98.97 to 118.65 from 104.62 at 124.30, which is reasonably close to 125.85 (2015 high). This will stay as the preferred case as long as 109.76 support holds. However, decisive break of 109.76 will dampen this bullish view and turns outlook mixed again.

EURGBP has advanced considerably today and is set to complete the third consecutive green day, recording a new two-week high near the 0.8850 resistance level. Short-term momentum indicators are supporting this bullish mood. The RSI is already above its neutral 50 line and is pointing higher, detecting accelerating upside speed. Moreover, the MACD is within negative territory but advanced above the trigger line with strong momentum.

If the price surpasses the 0.8850 resistance, it could find resistance near the 40-day simple moving average (SMA) at 0.8885 at the time of writing. If the bulls manage to pierce it, the 0.8995 region would come into scope again. Even higher, attention would turn to the 1-year high of 0.9100, achieved on August 28.

Alternatively, in case of downside pressure and a bounce off the 0.8850 obstacle, the price would return lower towards the 0.8720 support. The next immediate support is coming from the 0.8700 handle, identified by May 29. If sellers drove the pair below the aforementioned area, it could touch the 0.8620 support, where it bottomed on April 17.

Overall, the very short-term bias has turned to a more bullish one, however, the long-term structure looks neutral over the last year.

Daily Pivots: (S1) 1.3016; (P) 1.3060; (R1) 1.3109; More...

GBP/USD's fall resumed by taking out 1.3011 and reaches as low as 1.2956 so far. Intraday bias is back on the downside for 1.2921 first. Firm break there will add to the case that corrective rise from 1.2661 has completed. Next target will be 1.2661/2784 support zone. On the upside, above 1.3104 minor resistance will turn intraday bias neutral again. Also, in case of another rise, upside should be limited by 1.3316 key fibonacci level to bring down trend resumption eventually.

In the bigger picture, whole medium term rebound from 1.1946 (2016 low) should have completed at 1.4376 already, after rejection from 55 month EMA. The structure and momentum of the fall from 1.4376 argues that it's resuming long term down trend. And this will be the preferred case as long as 38.2% retracement of 1.4376 to 1.2661 at 1.3316 holds. However, firm break of 1.3316 would bring stronger rebound to 61.8% retracement at 1.3721. And, the eventual depth of the fall from 1.4376, and the chance of hitting 1.1946 low, will depend on the strength of the interim corrective rebound from 1.2661.

Italy is the center of focus in a rather quiet day. The highly anticipated response to EU on its budget is delivered. And there is little surprise that Italy insists on sticking with it's budget deficit target of 2019. Euro's rally attempt falters after that and turned mixed. Nonetheless, sterling is even weaker as Brexit uncertainty is neverending even though 95% of the withdrawal agreement is done. New Zealand and Australian Dollar continue to decouple from Chinese stock, which staged a strong rally today, and are trading as the next weakest. On other hand, Canadian Dollar, Dollar and Swiss Franc are the stronger ones today so far.

In other markets, Italian 10 year yield hit as low as 3.318 earlier today but it's now back at 3.474, down -1.08. The decline is more of a response to Moody's downgrade of Italy with stable outlook on Friday. German 10 year yield is down -0.20 at 0.443. German-Italian spread is now at 303, still an alarming level. European stocks are firm, though, with FTSE up 0.82%, DAX up 0.53% and CAC up 0.27% at the time of writing.

Another major development today and the strong rally in Chinese stocks. Shanghai SSE closed up 4.09% at 2654.88. The two day strong rebound should confirm medium term bottoming at 2449.19 after climax selling on Friday. There is prospect of breaking through 2700 psychological level in near term. Other Asian markets followed higher, with Hong Kong HSI up 2.32%, Nikkei up 0.37% and Singapore Strait Times up 0.51%.

Technically, GBP/USD's break of 1.3011 temporary low suggest decline resumption and focus is turned to 1.2921 support. At the same time, GBP/JPY is eyeing 145.67 key support level. Meanwhile, EUR/GBP's break of 0.8847 resistance is seen as signal of bullish reversal. EUR/USD was rejected by 4 hour 55 EMA today while EUR/JPY was rejected by 130.29 minor resistance. Nonetheless both pairs are kept well above last week's lows. Thus, EUR/USD and EUR/JPY are bias-neutral for now.

Italy tells EU it will stick to hard but necessary budget

In a formal response to the EU, Italian Economy Minister Giovanni Tria indicated the country will stick to its draft budget plan. That is, the deficit to GDP target for 2019 will be kept at 2.4%. Though, Tria expressed the eagerness to engage in conversation with EU. Prime Minister Giuseppe Conte also emphasized that 2.4% is the cap that "for sure we won't exceed".

Tria said the budget was a "hard, but necessary decision in light of Italy's delay in catching up to pre-crisis levels of GDP and the desperate economic conditions in which the most disadvantaged citizens find themselves in". And, "the government trusts that what it has explained is sufficient to clear up the setup of its budget and that the (fiscal) law will not put at risk the financial stability of Italy or other EU state members."

Also, he said "while recognizing the divergence of the respective evaluations, the Italian government will remain in a constructive and fair dialogue." And, "the government is confident it can get investment and GDP growth moving again and that the recent rise in the government bond yields will be reabsorbed as the investors learn about all the details of the measures in the budget law.".

EU Moscovici doesn't want crisis with Italy, Austria said must reject the budget

European Economic Affairs Commissioner Pierre Moscovici talked about Italy again in France Inter radio today. He emphasized that the European Commission does not want any crisis with Italy over it's budget. However, questions are there and the Commission is awaiting Italy's answers.

Moscovici said that "the European Commission does not want a crisis between Brussels and Rome." And "my state of mind is that of constructive dialogue." Though, he also reiterated that "when you are an EU member and a member of the single currency, of the euro zone, you must respect a number of joint rules." Moscovici has been rather cautious in handling Italy. While last week's letter to Italy regarding the budget was strongly worded, Moscovici later said he wanted to reduce tensions, and solve the budget issue through "constructive dialogue".

On the other hand, Austria Chancellor Sebastian Kurz warned that "if it is not amended, the European Commission must reject the budget" of Italy. Kurz added that "Austria is not prepared to stand up for the debts of other states while these states knowingly contribute to uncertainty in financial markets". And he urged the EU to "prove that it has learned from the Greece crisis."

Bundesbank expects German economy to expand considerably again in Q4

Germany's Bundesbank said today that the economy "may have come to a temporary halt" in Q3. The "booming" constructor sector have even "decelerated" after strong Q2. Also, retail sales were "relatively subdued". However, the bank does not expect the pause in growth to be long-lived. And, business expectations the auto sector "rose significantly of late."

Bundesbank expects "economic output to expand considerably again in the current three-month period." The bank also noted "rather sharp fall" in unemployment, which could be attributable in part to "the expansion of labour market policy measures at the end of the summer holiday period."

UK PM May rejects EU's proposal on Irish backstop again

UK Prime Minister Theresa May is set to tell the Parliament that Brexit agrement is now 95% done. But she also repeated her rejection of EU's proposal on Irish backstop.

In her prepared speech, May said "taking all of this together, 95 per cent of the Withdrawal Agreement and its protocols are now settled", referring to what she has achieved. And, "the shape of the deal across the vast majority of the Withdrawal Agreement is now clear."

However, on Irish border backstop, May said "As I set out last week, the original backstop proposal from the EU was one we could not accept, as it would mean creating a customs border down the Irish Sea and breaking up the integrity of the UK," She reiterated that "I do not believe that any UK Prime Minister could ever accept this. And I certainly will not."

So, the deadlock is still there and the deal is not finished yet. No matter how much May's done, without that outstanding 5% completed, it's still a no-deal Brexit.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.3016; (P) 1.3060; (R1) 1.3109; More...

GBP/USD's fall resumed by taking out 1.3011 and reaches as low as 1.2956 so far. Intraday bias is back on the downside for 1.2921 first. Firm break there will add to the case that corrective rise from 1.2661 has completed. Next target will be 1.2661/2784 support zone. On the upside, above 1.3104 minor resistance will turn intraday bias neutral again. Also, in case of another rise, upside should be limited by 1.3316 key fibonacci level to bring down trend resumption eventually.

In the bigger picture, whole medium term rebound from 1.1946 (2016 low) should have completed at 1.4376 already, after rejection from 55 month EMA. The structure and momentum of the fall from 1.4376 argues that it's resuming long term down trend. And this will be the preferred case as long as 38.2% retracement of 1.4376 to 1.2661 at 1.3316 holds. However, firm break of 1.3316 would bring stronger rebound to 61.8% retracement at 1.3721. And, the eventual depth of the fall from 1.4376, and the chance of hitting 1.1946 low, will depend on the strength of the interim corrective rebound from 1.2661.

Economic Indicators Update

The Canadian dollar has edged higher at the start of the week. In the Monday session, USD/CAD is trading at 1.3094, down 0.06% on the day. On the release front, it’s a quiet start to the week. Canadian Wholesale Sales is expected to drop to 0.1%, after a strong gain of 1.5% in the previous release.

It was a disappointing end to the week for Canadian numbers, as consumer spending and inflation data dropped into negative territory. Core CPI dropped by 0.4%, weaker than the estimate of -0.1%. Core Retail Sales declined by 0.4%, missing the estimate of 0.1%. Retail sales missed the forecast of 0.1%, with a reading of -0.4%. Will Friday’s dismal consumer numbers affect the Bank of Canada’s plan to raise rates next week? The markets are still expecting the BoC to raise rates by a quarter-point, which would mark the third rate increase in 2018. With Canada, the U.S and Mexico about to enter the USMCA, which replaces the NAFTA pact, the last obstacle for the BoC on the path to normalization has been removed and analysts are now expecting three rate hikes in 2019, up from a forecast of two hikes just a few months ago.

The U.S dollar was broadly higher on Thursday, after a hawkish tone from the Federal Reserve minutes. The minutes indicated that a majority of members want to continue raising interest rates until the U.S economy shows signs of slowing down. However, the duration of a tighter policy remains unclear, as the minutes noted that “there is considerable uncertainty surrounding all estimates of the neutral federal funds rate.” This would likely be around the 3 percent level, which will not be reached until the second half of 2019, as the Fed has indicated it will raise rates three times next year. At the September meeting, the Fed removed the phrase “the stance of monetary policy remains accommodative”, which was considered outdated, given the policy of steady rate hikes. As rates approach the “neutral rate”, we could see further changes in language at upcoming policy meetings.