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Comments by EU Commissioner Moscovici inspired BTP's on Friday and changed dynamics in what had been a dull Friday trading session. He said that the EU won't interfere in Italian economic policies and that they aren't willing to lecture the country on its budget. The Italian 10-yr yield spread narrowed by 25 bps to 302 bps after setting an intraday cycle high of 340 bps ahead of his comments. The Greek, Portuguese and Spanish spreads narrowed by 13 bps, 6 bps and 4 bps respectively. Core bonds lost ground with Bunds underperforming US Treasuries. The German yield curve shifted 1.3 bps (30-yr) to 5.2 bps (5-yr) higher. The US yield curve bear flattened with yields rising by 2.9 bps (2-yr) to 1.2 bps (30-yr). The single currency took the upper hand on FX markets with EUR/USD eventually settling above 1.15, compared with 1.1453 on Thursday night. EUR/GBP closed north of 0.88. European stock markets weren't inspired by the BTP rally after already failing to profit from momentum on Chinese equity markets. The latter gained ground following verbal interventions to support the market from regulatory heavyweights.

Asian stock markets trade mixed overnight with China again heavily outperforming (+5%). Rumours about income tax cut and comments by Chinese President Xi Jinping (unwavering support for the private sector) and a PBOC adviser (policy measures to support market) extend the rally. The spillover to other markets is again very limited. The US Note future and trade-weighted dollar tread water. Italian political leaders Salvini and Di Maio confirmed that they have no intention at all to leave the E(M)U. They'll respond to the EU today to explain next year's budget proposal in greater detail, but won't change their plans (2019 budget deficit of 2.4% of GDP). Friday's Moscovici comments hint that Italy might win this political battle. Moody's as expected cut the Italian rating by one notch from Baa2 to Baa3 (stable outlook), which is one level above junk. We think that S&P will do the same at Friday's scheduled review.

Today's eco calendar is empty. Risk sentiment on stock markets and sentiment towards Italy will set the tone for trading. The Moscovici remarks suggest that Italy will eventually get away with its fiscal spending plans, possibly extending the short-term relief rally in BTP's and improving European risk sentiment. That could help the euro while weighing on Bunds. Some investors might decide to stay sidelined though today, ahead of Wednesday's PMI's and Thursday's ECB meeting. The US Treasury's mid-month refinancing operation is a negative for US Treasuries this week. The Brexit story unfolds further with UK PM May addressing the UK parliament today. She is rumoured to be willing to agree remaining indefinitely within the EU customs union as a backstop, but that will be a tough sell in the House of Commons. EUR/GBP changes hands just above 0.88.

News Headlines

US President Trump signaled he might withdraw from a key nuclear arms-control agreement with Russia, a Cold War-era treaty from 1987 that required elimination of short- and intermediate-range nuclear missiles by both countries. According to Trump, Russia is not honoring that agreement .Russia already hit back at the US.

Saudi Arabia has officially acknowledged that Washington Post journalist Khashoggi was killed as a result of a fistfight in its consulate in Istanbul. They said Saudi's Crown Prince bin Salman wasn't aware. US Congress said the US must impose sanctions. Germany signaled it might suspend exports of military equipment to the country.

UK PM Theresa May faces parliament today as she is facing growing criticism over her willingness to extend the transition period beyond the current proposed end date of December 2021. This way, the whole UK will stay tied to EU customs rules, which is opposed by many of May's Conservative party.

XAUUSD (1228.21): Gold prices continued to maintain a flat range following the strong rally last week. Price action is currently perched near 1225.35 level and price action has been rather choppy. This potentially increases the risk of a correction. If gold prices break down below the support level, we expect a move toward the 1207.00 region. Establishing support here could potentially keep the upside bias in place leaving gold prices to target the 1225 level once again

GBPUSD (1.3074): The GBPUSD currency pair managed to turn flat at the support area of 1.3054 - 1.3028. If the currency pair maintains the rebound off this support level, we expect to see some upside in store. The resistance level near 1.3125 will, of course, need to be cleared in order for GBPUSD to resume the short-term uptrend. To the downside, if the support fails, then the currency pair could be seen extending the declines down to 1.2808.

EURUSD (1.1517): The EURUSD currency pair extended the declines and promptly posted a rebound off the support area of 1.1435 - 1.1466. This double bottom pattern signals a possible move to the upside. Price action will need to clear the resistance area of 1.1547 - 1.1525 in order to confirm the upside. A breakout above this area could trigger further gains that could push the EURUSD to test 1.1718 - 1.1745 level of resistance. This area also coincides with the minimum price objective of the double bottom pattern.

The U.S. dollar was seen easing back on Friday. Economic data on the day was relatively quiet. Canada's inflation fell more than expected declining 0.4% on the month. This was more than the forecasts of a 0.1% increase and marked a second consecutive month of declines.

On a year over year basis, Canada's inflation rose 2.2% which was the lowest in four months.

The retail sales report was also released which showed a 0.4% decline in core retail sales. Headline retail sales fell 0.1% missing estimates of a 0.3% increase.

The Canadian dollar fell sharply on the news.

The markets look to a quiet day of trading. Economic data is sparse across all the markets. In the Eurozone, the German Bundesbank will be releasing its monthly report. The NY trading session will see the Canadian wholesale sales report for the month.

Here are the latest developments in global markets:

FOREX: The dollar was down by 0.17% against a basket of six major currencies on Monday, extending losses from Friday. Those losses came as the currency with the biggest weight by far in this index – the euro – rebounded, amid encouraging signals that the EU and Italy may manage to avert a full-fledged conflict over budget deficit rules. The British pound edged higher on hints the UK may be softening its Brexit red lines, while the loonie crumbled after a set of disappointing Canadian economic data.

STOCKS: Wall Street closed mixed on Friday, giving back early gains as strong earnings from firms like Procter & Gamble (+8.80%) and PayPal (+9.42%) were eclipsed by another uptick in global bond yields, as tensions between Italy and the EU looked to be fading. The Dow Jones inched higher (+0.26%), the S&P 500 was nearly flat (-0.04%), while the tech-heavy Nasdaq Composite tumbled (-0.48%). That said, sentiment appears to be on a much stronger footing this week, with futures tracking the Dow, S&P, and Nasdaq 100 all pointing to a much higher open today. Accordingly, Asia was mostly in the green on Monday, with gains being led by China, where authorities announced plans to reduce income taxes. China’s CSI 300 is up by 4.32%, while in Hong Kong, the Hang Seng gained 2.29%. European indices were also set to open much higher today, futures suggest, amid a rosier outlook in Italy (see below).

COMMODITIES: Oil was higher on Monday, building on gains from Friday thta came on the back of improving risk sentiment. Earlier today, Saudi Arabia’s energy minister said his nation has no intention of unleashing an oil embargo on Western consumers. He added the Kingdom will isolate oil from politics, alleviating concerns it may use crude production (and by extent prices) as a bargaining chip amid a diplomatic crisis over the death of a Saudi journalist. In precious metals, gold is up by almost 0.10% today at $1227 per ounce, looking set to post its third consecutive session of modest advances.

Major movers: Euro bounces on hopes for Italian compromise; loonie crumbles

The euro posted notable gains in an otherwise quiet session on Friday, following signals that the EU-Italian standoff likely won’t escalate any further, and may instead be settled soon via a negotiated compromise. Specifically, EU Commissioner Moscovici said that the EU will not interfere with Italy’s economic policies, while separate reports suggested Rome is willing to consider lowering its highly controversial 2019 budget deficit target to 2.1% of GDP, from 2.4% previously, in an attempt to appease Brussels.

Most strikingly, the euro is also outperforming on Monday even though Italy’s deputy PM Di Maio poured cold water on hopes for a near-term settlement over the weekend, indicating Rome is definitely not rethinking its deficit target. What’s more, Moody’s also downgraded Italy’s sovereign debt rating on Friday, to one notch above junk status. Yet, both Italian bonds and the euro took the news in their stride, with Italian bond yields declining today across the entire maturity spectrum. Judging by the market moves, investors seen to expect this situation to blow over before too long given the EU’s apparent unwillingness to enforce its fiscal prudence, perhaps paving the way for an even larger relief bounce in the euro. That said, a lot may also depend on how the ECB meeting this week plays out.

In Canada, the loonie gave back some early gains to finish the session lower on the back of disappointing inflation and retail sales data. Interestingly, implied odds for a rate hike by the BoC this week remained stable at 90% according to Canada’s OIS. Hence, markets seem confident these won’t derail the Bank’s near-term plans, but could still lead to a so-called “dovish hike”, where any rate increase is accompanied by cautious commentary – downplaying the prospect of further action in the coming months.

Elsewhere, sterling popped higher on Friday amid reports the UK is ready to ditch one of its a key Brexit demands on the Irish border, in order to break the impasse in the talks. Meanwhile, the safe-haven yen was the worst performer on the day, surrendering ground even against the battered loonie, as the risk aversion that was at play for most of the week gradually dissipated. Risk appetite seems to have improved further this week, most likely aided by news out of China hinting at plans to cut individuals’ income taxes to boost growth.

Day Ahead: Brexit and Italy’s draft spending plans in the center stage; US-Sino trade war in the spotlight

The economic calendar will be lacking important releases on Monday with the Canadian wholesale trade data being the only of interest in major markets. Yet political noise around Brexit and Italy’s fiscal demands are expected to keep investors busy, while the US-Sino trade war will be another area of caution during the week.

On the Brexit front, the UK Prime Minister, Theresa May is scheduled to speak in the Parliament later today probably assuring lawmakers that the Brexit deal is almost complete after last week’s summit left EU leaders deadlocked over mechanisms to avoid a hard border in Northern Ireland. The meeting also follows a report from Bloomberg which revealed during the weekend that May’s administration is set to soften some of its Brexit demands regarding the sticking Irish border point, probably accepting an open-ended timeline for the backstop instead of a fixed end-date strongly supported previously. Yet May might be under severe pressure in the Parliament as some of her Conservative counterparts and some Labour members continue to disagree with her Brexit strategy. Should lawmakers criticize May’s plans once again, erasing optimism that a Brexit agreement is settled, the pound could give up earlier gains.

Meanwhile, investors will be closely monitoring progress on the Italian draft budget plan which the European Commission called non-compliant with the EU rules, while characterizing the deviation from its targets as unprecedented. Markets are now seriously considering that the EU will probably reject Italy’s budget on Tuesday and ask the government for revision. However, the fact that the Italian governing partners managed to end their fights over the budget draft on Saturday, shows that the battle with the EU could intensify in coming days, with the euro probably diving back below the 1.1500 key level.

Elsewhere, China’s willingness to use fiscal relief to mitigate threats from the US trade protectionism after GDP growth figures out of the country eased for the third quarter, signals that Beijing is not ready to give up on the trade war but remain on the defence. This leaves markets wondering whether the nations will turn to negotiations ever soon.

In equities, Ryanair will be among companies to report on earnings before the US bell, while Logitech International will issue results after US markets close.

Technical Analysis – EURUSD holds support around 1.1500; negative risks still possible

EURUSD bounced on the 1.1500 round level early on Monday and is currently increasing momentum to increase distance above its 100-period (simple) moving average and surpass the Ichimoku cloud. The RSI is fluctuating around its neutral threshold of 50 supporting that the price might enter consolidation in the short-term, though Stochastics signal that a reversal to the downside in likely as the green %K line and the red %D line are close to the overbought territory.

Should the market weaken, immediate support is expected around 1.1500. Moving lower, the area around 1.1460 could be another obstacle to get through before eyes turn to the 1.1431 bottom.

Alternatively a continuation of the recent rebound could target the area around 1.1562 which has been frequently acting as support in previous weeks. Steeper increases could also challenge resistance between 1.1600 and 1.1621.

EURUSD rebounded on the 1.1430 support and on the 50.0% Fibonacci retracement level of the upleg from 1.0340 to 1.2550 near 1.1450 on Friday, creating a sharp bullish day. Currently, the price seems to be steady and the technical indicators are in confusion for the next movement in the price. However, the impressive sell-off in the preceding days, drove the price below the 20- and 40-simple moving averages (SMAs) in the short-term, which posted a bearish crossover. Also, the inverse head and shoulders pattern is still in place.

Momentum indicators are pointing to a neutral to positive bias in the short term with the RSI just below 50 and is sloping marginally up, while, the MACD oscillator is moving sideways in the negative territory and is moving near the trigger line.

In the event of an upside reversal, creating more gains, the 20- and 40-SMAs could provide immediate resistances to the price at 1.1560 and 1.1605 respectively. Slightly higher, the 1.1620 peak is the next obstacle for the traders and if this level is successfully surpassed, it could drive prices towards the 38.2% Fibonacci of 1.1710. A break above it would take the pair until the psychological level of 1.1800.

In the wake of negative pressures and a drop below the 1.1430 significant support, negative pressures towards the 1.1300 handle could increase. Even lower, the 61.8% Fibonacci region of 1.1185 could be the next target.

Having a look at the longer timeframe, EURUSD has been developing within an inverse head and shoulders pattern since June, with shoulders at 1.1530 and 1.1430, the neckline at 1.1800 and head at 1.1300. Investors are waiting for a daily close above the 1.1800 barrier for a clear upside correction until the 1.2000 strong resistance.

To sum up, the price consolidates within the formation and has no clear directional movement at the moment, so investors need to wait the completion of this pattern for any positions in the near future.

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

Intraday bias in EUR/GBP remains neutral first. Also, with 0.8847 support turned resistance intact, near term outlook stays bearish. . On the downside, break of 0.8772 will target 0.8620 low first. Decisive break there will resume whole down trend from 0.9304. In that case, next target will be 100% projection of 0.9305 to 0.8620 from 0.9097 at 0.8412. However, firm break of 0.8847 will indicate near term reversal and target 0.8994 resistance instead.

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) 1.6084; (P) 1.6136; (R1) 1.6224; More....

Intraday bias in EUR/AUD stays mildly on the upside at this point. Pull back from 1.6357 should have completed at 1.6048. Further rise would be seen to 1.6357 first. Decisive break there will resume larger up trend for 1.6587 key resistance next. On the downside, even in case of another fall, outlook will stay bullish as long as 1.5984 support holds.

In the bigger picture, up trend from 1.3624 (2017 low) is still in progress. Further rise should be seen to retest 1.6587 (2015 high). Decisive break there will resume the long term rally and target 1.7488 fibonacci level. On the downside, break of 1.5984 support is need to be the first sign of medium term reversal. Otherwise, outlook will remain bullish in case of deep pull back. However, sustained break of 1.5984 will be an early sign of trend reversal.

Daily Pivots: (S1) 1.1411; (P) 1.1452; (R1) 1.1511; More...

EUR/CHF's break of 1.1492 suggests resumption of rebound from 1.1173. Intraday bias is now back on the upside for 1.1713 resistance next. Decisive break there will confirm completion of whole fall from 1.2004 and target a test on this high. On the downside, however, break of 1.1392 minor support will argue that the rebound has completed and turn bias back to the downside for 1.1154/98 zone again.

In the bigger picture, price actions from 1.2004 medium term top is seen as a correction only. Downside should be contained by support zone of 1.1198 (2016 high) and 61.8% retracement of 1.0629 to 1.2004 at 1.1154 to complete it and bring rebound. This cluster level is in proximity to long term channel support (now at 1.1234) too. A break of 1.2 key resistance is still expected in the medium term long term. However, sustained break of the mentioned support zone will mark reversal of the long term trend. In that case, 1.0629 key support will be back into focus.