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GBP/USD made a bullish bounce at the support trend line (blue) near 1.2950 as expected. The bullish bounce could indicate the end of the wave 1 (blue) and the start of wave 2 retracement.

GBP/USD could make a bullish correctionback towards the Fibonacci retracement levels of wave 2 vs 1 unless price manages to break below the support trend line. Price is expected to bounce at the Fib levels without breaking above the top (100% Fib level).

GBP/USD seems to have completed 5 waves (blue) within wave 1 (purple) and could be ready for a wave 2 (purple) if price manages to break above the resistance trend line (red) and if it stays above 1.2950 support.

Notes/Observations

• Italian BTP futures fade early move higher as Italy Government officials mull deficit cut beyond 2019, whilst confirming 2019 deficit target
• Eurozone Services PMI reading come in mixed, Japan sinks to two-year low

Asia:

• Japan Services PMI falls to 2-year low, some companies were hurt by recent earthquake
• Australia Building Approvals missed forecasts due to a sharp fall in apartment approvals

Europe:

• Italy is said to lower its 2020 deficit target to 2.2% and to 2.0% in 2021, down from 2.4% agreed in 2019 in a move to appease the EU following mounting pressure.
• Italian BTP yields retreat following sharp rise yesterday
• Spanish Services PMI falls to 5-year low, with business sentiment at an over 5 year low, UK and Germany also missed forecasts, while Italy and France beat estimates and the Euro zone was inline.
• Turkish Lira weakens on stronger than expected September Inflation readings
• German Markets closed for Unity Day

Macro

• (IT) Italy: Italy to offer compromise on budget according to newspaper reports that say Italy's government will try to appease the EU by reducing budget deficit targets for 2020 and 2021 to 2.2% and 2.0% respectively. Corriere della Sera cited a Cabinet Meeting and reported that the deficit for 2019 will be left unchanged at 2.4%. To talk about a deficit target three years out is very much supposition; fiscal plans still need to match that in order for the deficit next year to fall within the target.
• (EU) Eurozone: Eurozone services PMI was confirmed at 54.7 with the composite reading revised down slightly to 54.1. Cost inflation remained sharp and output price inflation picked up, most notably in Germany. However, the survey also highlighted concerns over geopolitics and trade tensions. The data points to growth of almost 0.5% in Q3 but projects a slowdown in Q4 with the most worrying signs coming from exports. The steady erosion of order books will eventually impact the labor market and hiring will likely slow.
• (AU) Australia: Building approvals fell 9.4% m/m in August, following the -5.2% drop in July. The decline was driven largely by a -17.2% fall in approvals for the typically volatile of unit/townhouse/apartments category. The construction boom has resulted in an oversupply of housing at a time when the banks have started to raise mortgage rates. Australian households are the second most indebted in the world, its banks are the most exposed to housing debt. Higher rates obviously mean less disposable income, consumer spending etc. to the detriment of the economy.
• (CA) Canada: Canadian dealer vehicle sales fell -7.4% to 173.0k in September according to desrosiers, which followed the -1.6% decline to 180.9k units in August. This was the seventh consecutive month of annual decline and comes amid rising interest rates and increasing vehicle prices.

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

• Indices [Stoxx600 +0.3% at 383.2, FTSE +0.2% at 7,487, DAX closed, CAC-40 +0.2% at 5,476, IBEX-35 +0.1% at 9,314, FTSE MIB +0.3% at 20,618, SMI +0.6% at 9,145, S&P 500 Futures +0.2%]
• Market Focal Points/Key Themes: European indices open higher across the board, remaining in the green as the session progressed; Risk sentiment aided after Italian press reports budget plan; financial sector best performer along with Telecom (following Italy 5G spectrum auction); material sector underperforming Germany closed for holiday; Italian banks among better performers following reports Italy may offer concessions to EU on budget; Aston Martin started trading;earnings expected in the upcoming US session include Lennar and Synnex

Equities

• Consumer discretionary: Gym Group GYM.UK -0.2% (new CFO), Tesco TSCO.UK -8.6% (earnings), Topps Tiles TPT.UK +11.2% (earnings), Aston Martin AML.UK -4.5% (IPO)
• Consumer staples: Ite Group ITE.UK -4.5% (earnings, acquisition)
• Energy: Norsk Hydro NHY.NO -12.8% (Alunorte shutdown), Rubis RUI.FR +2.7% (analyst action)
• Financials: Schroders SDR.UK +1.3% (reportedly to be awarded contract)
• Healthcare: Vitrolife VITR.SE +2.8% (outlook)
• Industrials: Astaldi AST.IT +19.5% (extension of temporary short ban), Michelin ML.FR +2.8% (analyst action)
• Technology: Altran ALT.FR +9.6% (JV, analyst action)
• Telecom: Iliad ILD.FR +0.9% (Italian 5G auction)

Speakers

• (IT) Italy Fin Min Tria has reassured to set budget deficit at 2.2% of GDP for 2020, 2% for 2021 - Sole
• (JP) Bank of Japan (BOJ): Japan Q2 output gap rises to the highest level since 2007: 1.86 v 1.63 q/q
• (IT) Italy's Interior Min Salvini: Both debt and deficit will fall in the next few year; Doesn't give a damn on EU threats - Canele 5
• (UK) Govt official Lidington (de facto Dep PM): we are bringing forward more detailed proposals on the N-Irish backstop very soon
• (IT) Italy 5-Star Government Source: Gov to confirm 2019 deficit at 2.4% of GDP; May reduce 2020, 2021 to below 2.2% and 2% respectively - press
• (IN) India Fin Min official: Reserve Bank of India
• (RBI) unlikely to take knee-jerk action on rupee, oil
• (IT) Italy Deputy PM Di Maio: 2019 deficit at 2.4% confirmed; govt mulling cutting Debt/GDP ratio after 2019

Currencies

• Turkish Lira declined as September CPI comes in sharply ahead of consensus. USD/TRY breaks above the 6.002 resistance to trade at a 5 day high before fading the whole move on the back of comments from Turkey Fin Min Albayrak who announced plan on fight against inflation next week
• EUR/USD rises following recent weakness after Italy will look to reduce its deficit target in 2020 and 2021.

Fixed Income

• Bund Futures trades at 159.13 down 44 ticks Italy bows down to EU and cut 2021 deficit target . A downside break of 158.25 sees 157.69 initially.
• Gilt futures trades at 121.29 down 12 ticks following the move in Treasuries. Continued support at 120.50, with a continued move higher targeting 123.93 then 124.00.
• Wedneday's liquidity report showed Tuesday's excess liquidity rose from €1.867T to €1.870T. Use of the marginal lending facility stayed rose from €71M to €91M.
• Corporate issuance saw 5 high grade issuers raise $31.2B in the primary market

Economic Data:

• (ES) SPAIN SEPT SERVICES PMI: 52.5 V 52.9E (58 month of expansion and lowest since Nov 2013)
• (UK) SEPT SERVICES PMI: 53.9 V 54.0E (26th month of expansion)
• (IT) ITALY SEPT SERVICES PMI: 53.3 V 52.8E (27th month of expansion)
• (DE) GERMANY SEPT FINAL SERVICES PMI: 55.9 V 56.5E (confirms 63rd month of expansion)
• (FR) FRANCE SEPT FINAL SERVICES PMI: 54.8 V 54.3E
• (TR) TURKEY SEPT CPI M/M: 6.3% V 3.4%E; Y/Y: 24.5% V 21.1%E
• (IE) Ireland Sept Services PMI: 58.7 v 58.0 prior
• (SE) Sweden Sept Sept Services PMI: 56.6 v 57.1 prior
• (RU) Russia Sept Services PMI: 54.7 v 53.0e (32nd month of expansion)
• (HU) Hungary Aug Retail Sales Y/Y: 6.8% v 5.7%e
• (IS) Iceland Central Bank (Sedlabanki) leaves 7-Day Term Deposit Rate unchanged at 4.25%
• (IT) Italy Q2 YTD Deficit to GDP: 1.9% v 3.5% prior
• (EU) Euro Zone Aug Retail Sales M/M: -0.2% v 0.2%e; Y/Y: 1.8% v 1.7%e
• Issuance (SE) Sweden sells SEK1.5B in 2029 bonds; Avg Yield 0.8375% v 0.7187% prior

Looking Ahead

• 07:00 (US) MBA Mortgage Applications w/e Sept 28th: No est v 2.9% prior
• 08:00 (HU) Hungary Central Bank (MNB) Sept Minutes
• 08:05 (UK) Baltic Dry Bulk Index
• 08:15 (US) Sept ADP Employment Change: Ke v 163K prior
• 09:00 (BR) Brazil Sept PMI Services: No est v 46.8 prior
• 09:45 (US) Sept Final Markit Services PMI: 52.9e v 52.9 prelim
• 10:00 (US) Sept ISM Non-Manufacturing Index: 58.0e v 58.5 prior
• 10:30 (US) Weekly DOE Crude Oil Inventories

Global trade developments, Brexit-related uncertainty, turmoil in Italy and rising commodity prices have certainly made the first few trading days of Q4 quite eventful.

Investors initially rushed into the final trading quarter with a “risk-on” approach, after Canada signed a trilateral deal with the United States and Mexico over the weekend. However, this sense of optimism was later washed away by ongoing U.S.-China trade tensions and market jitters over Italy. With the brewing developments in Italy prompting investors to scatter away from riskier assets, safehaven Gold was back in fashion.

Gold is poised to remain as one of the major talking points across financial markets this week after aggressively appreciating by roughly $18 in thespan of three hours. The yellow metal certainly surprised markets by soaring from $1,190 to $1,208 during Tuesday’s session as uncertainty around Italy fueled risk aversion. With the precious metal powering higher against a broadly stronger Dollar, the outlook certainly points to further upside in the near term. However, with the key fundamental drivers weighing heavily on Gold still firmly intact, the medium-to longer-term outlook remains tilted to the downside.Focusing on the short-term technical outlook, the breakout and daily close above the $1,200 psychological level could open a path towards $1,213 ahead of Friday’s U.S. jobs report

In the currency markets, the Pound offered a fairly muted reaction this morning after UK services PMI dipped to 53.9 in September versus the 54.00 expected. Sterling is clearly more concerned about Theresa May’s keynote speech at the Conservative party conference later today. The unsavory combination of Brexit uncertainty and political drama in Westminster have dented investor attraction towards the Pound. This continues to be reflected in the GBPUSD which is struggling to trade back above the 1.3000 level as of writing. In regards to the technical picture, sustained weakness below the 1.3050 could inspire investors to attack the 1.2900 level in the short term.

Currency spotlight – EURUSD

The Euro stood tall against other major currencies on Wednesday morning following reports that Italy will trim its budget deficit at a faster pace than expected.

According to Italian newspaper Corriere dellaSera, the Italian government is planning to reduce its deficit to 2% of GDP in 2021. While this welcome development could push the Euro higher in the near term, the outlook on the daily charts remains bearish. A solid daily close back below 1.1550 could push the currency pair towards 1.1480.

USD Asia tracked through a tight range watching the EUR move from the sidelines with China and South Korean markets out.

INR the major focus

USDINR moves lower trading with heavy tone on headlines that the Government is in talks with the RBI for a USD swap window.

Something key to watch out for in the coming days is India delving into the option of opening a window for oil marketing companies (OMCs) to buy US dollars directly from the Reserve Bank of India (RBI) to arrest the rupee’s slide. Indeed, drastic times call for drastic measures. Remember OMC’s are getting 100 % of their dollar requirements from the market which will take a massive burden off the Rupee.

But when things were looking up headline risk rears its ugly head.

RBI unlikely to take knee-jerk reaction on INR and Oil

RBI averse to separate USD window for Oil companies

These headlines cannot be good news for a currency that is trading at an all-time low. INR is reacting very negatively and is now at 73.23. Markets remain extremely unsettled.

Rupee and Oil

Bu looking at the SWAP window which would be short-term bullish for both oil prices and the Rupee as it would temporarily halt the debate about how the weaker EM currency profile INR could have a negative impact on domestic oil imports but ultimately everyone must pay the piper. RBI would not be giving the USD to oil companies for good, but merely doing sell/buy FX swaps with them. In other words, only delaying the inevitable, but in theory, the hope is that these measures will allow the INR to be better positioned to withstand higher oil prices.

The biggest concern, however, is a weaker INR could be catastrophically destabilising for India capital markets as at some point India would have increased problems servicing their US dollar-denominated debt.

Oil prices

Brent remains firm despite consolidating recent gains as the market rebalance positions based on a further decline in Iranian crude oil production versus the September increases in overall OPEC supply and Russian record output. But Oil bulls are sitting tight and are looking for a catalyst to take over the top and clear a path for and the assault on $100,

But Oil interest has sparked up in London markets, and in the absence of any specific headlines, I suspect its more of ” the song remains the same” on the bullish narrative scale. But the sentiment is likely getting a bump from Italian de-escalation possible risk While oil traders are back on p hurricane watch as Leslie is an official Hurricane now tracking 505m east-southeast of Bermuda.

While we’re waiting for something to break on oil prices. We’re now taking wagers on which Oil producing giants will become the undisputed heavyweight champion of the oil patch, Russia vs the USA., and this is in the wake of the Russia eye-catching 11.36 million barrels per day record output.

Gold Prices

Are trading lower as Italian risk abates, suggesting we will return to the DXY -XAU correlation shortly again. But indeed, more than a few gold traders are licking their wounds after last nights squeeze.

G-10 Currencies

The EURO: A tempest in a cappuccino cup or mama mia, here we go again?

The Italy show was the only game in town in Singapore, and even then, there didn’t seem to be any significant alarm bells ringing despite the EUR pulling back from near-term oversold positions.

While the Italian headlines didn’t precisely toggle the “risk on” sentiment switch, cross-asset are trading more positively.

The markets realise anything can happen in the next six weeks notwithstanding the fact 2 % is still a monster of a deficit and two years is an eternity when it comes to being budget compliant. Deficits tend to take on a life of their own and dragon if not move higher. Given the emotional nature of Italian politics, there will be lots of political manoeuvring ahead of the final decision, so the market will probably be less keen to extrapolate too much out of today’s headline. Indeed, curb your enthusiasm but do tune in the headlines in Europe.

Trading the EUR is difficult in these conditions given the next signal is little more than a political headline out of Italy.

Japanese Yen

Not much from Powell last night, a mixed bag of headlines to sway sentiment in Asia. In London and New York, traders will be on the outlook for more headlines around Italy and whatever and whatever could potentially ignite but the dollar bulls are holding on. However, on a test below 113.50, I’m sure there will be more than a few who will reconsider staying long USDJPY as that would be a clear signal risk is getting very very shaky.

Canadian dollar

BOC is well priced through the end of next year. While a bit of Grind vs the USD bullish bets continue to play out through the EUR rather than USD

EURUSD is coming down very nicely, now falling out of a wave b channel which confirms the fact that market is making a decline into wave c of a B flat correction. If that's the case then bounce will occur from around 1.1500 area.

EURUSD, 4h

The European Single Currency appreciated 0.17% against the US Dollar since Tuesday's session. On Wednesday, the rate was located between the 55-hour and the 100-hour simple moving averages at the 1.1587 mark.

In regards to the near future, the resistance of the 100-hour simple moving average will push the rate to go downwards passing through the 55-hour simple moving average to trade near the weekly S1 at the 1.1511 level during the day.

On the other hand, the rate might break the 100-hour SMA and use the 100-hour SMA as support to surge upwards to the monthly PP at the 1.1649 level.

The British pound depreciated 0.25 % against the US Dollar since Tuesday's session. On Wednesday morning, the rate was resisted by the 55-hour simple moving average at the 1.3001 mark.

In the near-term future, the 55-hour simple moving average will try to resist the rate from surge during the day. Most likely, the rate will move downwards to trade near the weekly S1 at the 1.2948 mark.

On the other side, the UK Service PMI release could push the rate to surge upwards to break the 55-hour SMA resistance to allocate the rate near the monthly PP at the 1.3038 mark.

The US Dollar depreciated 0.08% against the Japanese Yen since Tuesday's session. On Wednesday morning, the currency pair was squeezed between the 55-hour and the 100-hour SMAs at the 113.83 mark.

In regards to the near future, most likely, the US Dollar will continue surge upwards to the weekly R1 at the 114.13 level. The 100-hour SMA will support the rate during the trading session.

On the other hand, the resistance of the 55-hour simple moving average might pass the 100-hour SMA support to push the currency exchange rate to go towards the weekly pivot point at the 113.28 level.

The gold price appreciated 1.34 % since Tuesday's session. On Wednesday morning hours, the yellow metal was located at the 1,204.39 mark.

In regards to the near-term future, most likely, the yellow metal will trade sideways during the trading session. The simple moving averages will try to catch up the rate to support to in next trading sessions.

On the other hand, today's fundamental news could affect the gold to break the medium descending pattern to trade near the monthly R1 at the 1,209.98 mark.

The Pound Sterling has increased its trading range against the Australian Dollar. This movement has been constrained by a one-month ascending channel.

Currently, the pair is trading near the lower boundary of the channel pattern at 1.8097. the likely outcome would be a reverse from the bottom border and a surge towards a resistance cluster formed by the weekly R1 and the 100-hour simple moving average at 1.8195.

Technical indicators on the 4(H) time frame suggest that this move might not happen immediately.

The important level to look out for within this session will be at a support cluster formed by the monthly S1 and the 200-hour SMA at 1.7043.