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Renewed worries over Italian budget send EUR lower. Will it last?

The US dollar surged across the board on Tuesday morning as market participants expect Donald Trump to bring the trade war with China back under the spotlight. Even safe-haven currencies struggled to resist the broad-based dollar rally with USD/CHF rising 0.10% to 0.9855, while the Japanese yen edged higher amid positive developments on trade talks between the US and Japan. USD/JPY fell 0.15% to 113.75 during the Asian session.

The single currency continued to lose ground against the buck with EUR/USD falling to 1.1525, the lowest level since 21 August, amid renewed worries over the Italian budget. German Bunds yields have been under significant pressure since last week with the 2-year yield down 6.5bps to -0.56%, while the Italian equivalent surged 75bps to 1.50%. Today, the FTSE MIMB was down 1.80%, while the EuroStoxx 600 slid 0.55%.

For now, the risk off sentiment will prevail in the coming days as investors focus on Italy, while the trade war between the US and its main trading partners, with the exception of China, improves somewhat. However, we believe the Italian situation will resolve itself in the coming week, which would eventually push the single currency higher.

Long MXN on NAFTA 2.0

After a year of tense and extremely public negotiations Mexico, Canada and the United States have reached an agreement to modernize NAFTA. With more than 1,800 pages the USMCA (aka US, Mexico, Canada Agreement) is a daunting document. Details and consequence remain uncertain (initial reviews say that US has improved in some areas but weakened in others). The headline takeaways are positive, however. Yes, US demands previously considered "non-negotiable" were reworked, but the US was able to keep steel and aluminium and added agriculture tariffs, while Canada and Mexico were able to secure cover from auto tariffs. Although the details might end up damaging specific sectors of the individual countries, the overall result should be positive for Canada and Mexico. Firstly, it removes a huge uncertainty risk. Secondly, after a period of extreme trade tensions the US neighbours have now secured clear trading rights. This is major advantage for the global supply chain.

The MXN (Mexican peso) should further stabilize and mostly outperform its LATAM peers. USMCA will allow US and external domiciled corporates to "hide" in Mexico and this suggests that the MXN should gain from US trade war escalations but also from broad risk appetite. In addition, high yields will naturally attract investors. Finally, political uncertainty is fading after the uneventful Mexican presidential election. On the other hand, USD trade is on life support. The Fed rate path is broadly priced in and a political storm in the form of the US midterm elections is coming.

• USMCA boost short-lived;
• Italian concerns weigh again as official suggest solution lies outside the union;
• Sterling under pressure ahead of Tory conference.

US stock markets are expected to open around half a percent lower on Tuesday, reversing much of Monday’s gains as investors quickly move on from the positive trade developments in North America.

Investors were clearly buoyed by the USMCA announcement at the start of the week, with the deal removing one of a number of economic risks for the global economy and potentially acting as a roadmap for similar negotiations with others. That positivity hasn’t lasted long though, with futures appearing to take a lead from Europe which has a number of problems of its own, aside from a trade spat with Trump.

European stock markets and the single currency are trading in the red on Tuesday, with Italian fiscal concerns continuing to weigh on the region. Investors have become increasingly concerned about the coalition government’s spending plans, with the deficit under the proposals being larger than many had expected and leaving Italy on a collision course with Brussels, something that shouldn’t really come as a surprise given their historic eurosceptic views and bullish campaign promises.

Still, investors are not particularly comfortable with the path that the government has embarked on which has been reflected in the spike in Italian yields, more than 5% decline in the FTSE MIB over the last week and a decline in the single currency. Brexit may well be posing the greatest headache for euro leaders at the moment but this has the potential to cause a much greater one further down the road if it’s not managed carefully.

While the leaders of both Five Star Movement and the League have repeatedly stressed their commitment to the eurozone and EU – despite previous views that somewhat differ – this has frequently been accompanied by comments clearly intended to drum up support for the opposite and this morning’s from Claudion Borghi was no different. The League economy head claimed Italy would solve most of its problems if it had its own currency which aided further declines in the euro and Italian stocks.

The pound is also coming under renewed pressure this morning, with yesterday’s spike proving short-lived as reports suggested that Theresa May is willing to offer further concessions on the Irish border in order to get talks moving again. This initially pushed the pound around one cent higher against the dollar but these were quickly reversed and it now finds itself back at three week lows, with traders questioning whether this is something that will get the support it needs from her own lawmakers, let alone the EU.

The Tory annual conference has provided some interesting soundbites at the start of the week but not much more, with significant divisions clearly still existing on the vision for Brexit and how to get there. All eyes will be on Theresa May’s speech on Wednesday to see whether we get more insight on plans to bridge the divide with the EU and ensure we don’t unintentionally head for a no deal Brexit that could have significant economic consequences, not to mention political ones for the Conservative Party.

The EUR/USD currency pair

Technical indicators of the currency pair:

Prev Open: 1.16158
Open: 1.15791
% chg. over the last day: -0.24
Day's range: 1.15350 – 1.15474
52 wk range: 1.0571 – 1.2557

Sales are prevailing on the EUR/USD currency pair. Demand for the US currency is still high amid improvements in international trade. At the moment, the key support and resistance levels are: 1.15200 and 1.15700, respectively. We recommend opening positions from these marks. The EUR/USD currency pair has the potential for further decline.

The news feed on the economy of the Eurozone and the US is calm. We recommend paying attention to the speech by the Fed Chairman Powell.

Indicators point to the power of sellers: the price has fixed below 50 MA and 200 MA.

The MACD histogram is in the negative zone, below the signal line, which gives a strong signal to sell EUR/USD.

Stochastic Oscillator is in the oversold zone, the %K line is crossing the %D line. There are no accurate signals.

Trading recommendations

Support levels: 1.15200, 1.14800
Resistance levels: 1.15700, 1.16100, 1.16500

If the price fixes below the support level of 1.15200, the EUR/USD quotes are expected to fall. The movement is tending to 1.14800-1.14600.

Alternative option. If the price fixes above the already “mirror” resistance level of 1.15700, we recommend considering purchases. The target movement level is 1.16100-1.16500.

The GBP/USD currency pair

Technical indicators of the currency pair:

Prev Open: 1.30379
Open: 1.30423
% chg. over the last day: +0.03
Day's range: 1.30254 – 1.30442
52 wk range: 1.2361 – 1.4345

Yesterday, there was a variety of trends on the GBP/USD currency pair. The British pound strengthened after it became known that the UK was ready to compromise in solving the problem with the Irish border. British Prime Minister Theresa May plans to sign an agreement on Brexit with the European Union. At the moment, quotes are declining. The key support and resistance levels are: 1.29850 and 1.30350, respectively. Positions should be opened from these marks.

At 11:30 (GMT+3:00) the index of economic activity in the UK construction sector will be published.

Indicators point to the power of sellers: the price has fixed below 50 MA and 200 MA.

The MACD histogram is in the negative zone, below the signal line, which gives a strong signal to sell GBP/USD.

The Stochastic Oscillator is in the oversold zone, the %K line is crossing the %D line. There are no accurate signals.

Trading recommendations

Support levels: 1.29850, 1.29500
Resistance levels: 1.30350, 1.30800, 1.31200

If the price fixes below the support level of 1.29850, a further drop in the GBP/USD quotes is expected. The movement is tending to 1.29500-1.29300.

An alternative may be the growth of the GBP/USD currency pair to the level of 1.30800-1.31000.

The USD/CAD currency pair

Technical indicators of the currency pair:

Prev Open: 1.28477
Open: 1.28095
% chg. over the last day: -0.19
Day's range: 1.28198 – 1.28295
52 wk range: 1.2059 – 1.3795

At the moment, the USD/CAD currency pair has become stable after a sharp decline at the end of September. Quotes are in a sideways trend. Investors expect additional drivers. Key support and resistance levels are: 1.27850 and 1.28300, respectively. Positions should be opened from these marks. We recommend paying attention to the dynamics of oil prices.

Today, the publication of important economic reports from Canada is not planned.

Signals of the indicators are different: the price has fixed below 50 MA and 200 MA.

The MACD histogram is in the negative zone, but has started rising. There are no accurate signals.

Stochastic Oscillator is located near the overbought zone, the %K line is above the %D line, which indicates the USD/CAD quotes growth.

Trading recommendations

Support levels: 1.27850, 1.27500
Resistance levels: 1.28300, 1.28600, 1.29000

If the price fixes below 1.27850, we recommend looking for entry points to the market to open short positions. The target level for profit taking is 1.27500-1.27300.

Alternative option. If the price fixes above the resistance level of 1.28300, correction of the USD/CAD quotes is expected. The movement is tending to 1.28600-1.29000.

The USD/JPY currency pair

Technical indicators of the currency pair:

Prev Open: 113.703
Open: 113.875
% chg. over the last day: +0.13
Day's range: 113.686 – 113.775
52 wk range: 104.56 – 114.74

Yesterday, the USD/JPY currency pair kept the round level of 114.000. At the moment, the technical pattern is ambiguous. The trading instrument is testing local support of 113.700. In the near future, correction of the USD/JPY quotes is not excluded after a prolonged rally. Positions should be opened from the key levels. We recommend paying attention to the US government bonds yield.

The news feed on the economy of Japan is calm.

Indicators do not send accurate signals: the price has crossed 50 MA.

The MACD histogram is located near the 0 mark.

Stochastic Oscillator is near the oversold zone, the %K line is below the %D line, which indicates the bearish sentiment.

Trading recommendations

Support levels: 113.700, 113.450, 113.300
Resistance levels: 114.000

If the price fixes below the local support of 113.700, correction of the USD/JPY currency pair is expected. The movement is tending to 113.450-113.300.

An alternative may be the further growth of the USD/JPY quotes to the level of 114.000-114.250.

IMF may also be cutting its global growth outlook under the current circumstances.

US futures and European markets are trading lower as the global investor sentiment remains fragile. Clearly, investors have nothing to cheer about and this is despite the fact that we have seen the US making a trade deal with Mexico and Canada. What is impacting the market most is the announcement that the IMF may also be cutting its global growth outlook under the current circumstances and the situation over in Italy is becoming more serious.

It was Greece which used to keep investors on their toes but lately, Italy has taken this job. Italian bond yields are under major stress and this remains the playground among speculators. Yesterday, we have seen the Italian 10-year bond yield rising again as investors have started to price in the risk factor. The massive sell-off for the Eurozone is a further evidence of this and the currency is paying a heavy price because of the Italian crisis. The head of the European Commission made matter even more arduous for the Italian finance minister after reminding him that the country is heading towards a Greek-style crisis. This statement alone pushed the Italian bond price at their weakest level in nearly four years. The fact is that the Italian government needs to reconcile its expensive campaign promises but then at the same time, Italy is no Greece and the European Commission need to understand this element very clearly. The Italian government also needs to understand that when it submits its budget to the commission in mid-October, the odds should be stacking up in their favour. The country cannot afford to have rejection as this will not be only bad for bond yields but also for the currency as well.

Moving away from the European crisis, there is a significant amount of focus on the trade deal but not enough optimism around the China-US trade deal. The current optimism is fuelled on the back of hopes that Donald Trump would be able to strong-arm China as well just like he did with Canada. Both Mexico and Canada left the NAFTA behind and decided to join a trade agreement which is built on Donald Trump’s demand. The new trade agreement will be called United States-Mexico -Canada Agreement. The hopes are very little to none when it comes to US-China agreement because the same strategy isn’t working with China.

Bitcoin Struggles to Break Resistance

As for the crypto market, Bitcoin price is consolidating on the back of a low volume. We are struggling to break the resistance of 6800 and 7000. The support of 6000 remains a major focal point. Having said this, one trend which is very clear for us is that retail industry is becoming less and less convinced about the new ICO industry, this is also evidently clear by looking at the capital raised in the past few months and compare this amount to last year. Having said this, the operation on the OTC desk is very difficult, bigger wallets are only adding to their positions with each drop in the currency. They prefer the price to remain more stable as this assures the general public that Bitcoin is no longer a volatile currency.

Gold Traders Focused on Powell's Speech

In the gold market, there is no evidence that the bulls have gained any kind of strength. Of course, the main economic data which has the ability to move the gold price needle substantially is the upcoming US NFP on Friday. But, what can also bring some volatility for the gold price is the Jerome Powell's speech, the Fed chairman. Yesterday we had a pretty weak economic (ISM manufacturing PMI and construction spending), this is something which Jay Powell will have to explain. The Fed needs to keep the economic data close to their heart and if the data shows weakness they need to make sure that there is a fair adjustment in their policy. The Fed is firmly on the path for another rate hike this year but given the ISM manufacturing number and if we start to see similar weakness in other numbers like the housing market and consumer sentiment, then all bets are off.

While Euro and Italy catches a lot of attention today, we'd like to point out a development in Asia. USD/CNH (offshore Yuan) surges again today and takes out 6.8959 resistance. This is an important sign of underlying weakness in the Yuan. And the pair could head back to 6.9856 high for a test.

Additionally, Hong Kong HSI also suggested steep selloff, by -2.38% today. These two are important signs that Chinese markets could return from holiday next week in deep trouble. While Euro is weak today, Australian Dollar is even worse, because of that.

EUR/USD drops through 1.1525 near term support today as selling intensified. Technically, that should confirm completion of corrective rebound from 1.1300, with three waves up to 1.1814, after hitting 38.2% retracement of 1.2555 to 1.1300 at 1.1779. Retest of 1.1300 should be seen next.

The renewed selloff was triggered by comments from the euroceptic politicians and government in Italy. Firstly, president of the lower house budget committee Claudio Borghi, economics spokesman of the League, told Reuters that " I am personally convinced that Italy would be better off with its own currency". Though, he also repeated again and again that "leaving the euro is not in the government's program and it has no plans to do so." Borghi's position is well known and it's actually nothing new.

Secondly, from 5-Star Movement Leader, Deputy PM Luigi Di Maio, insisted that "We are not turning back from that 2.4 percent target, that has to be clear ... We will not backtrack by a millimetre". Another Deputy PM Matteo Salvini, leader of the League also said yesterday that "No-one in Italy is taken in by Juncker's threats."

Meanwhile, European Commission Vice President Valdis Dombrovskis reitereated today that "what we see currently now seems to be not compliant with the Stability and Growth Pact but we are open to dialogue with the Italian authorities and hope that the budget will be brought in line with the requirements of the Stability and Growth Pact."

In short, Italy is in clash with EU on budget and no one is backing down.

Sterling fell below psychological 1.30 support against the dollar in fresh bearish acceleration on Monday, signaling continuation of bear-leg from 1.3297 peak, after Friday's action ended in long-legged Doji candle with long upper shadow.

Fresh bears broke into thick daily cloud (cloud top lays at 1.3012, reinforced by 30SMA) and violated next strong supports at 1.2988 (55SMA) and 1.2980 (50% of 1.2661/1.3297 ascend), generating further negative signals.

Fresh strength of the greenback keeps pound at the back foot, with risk of further weakness towards next key supports at 1.2904 (Fibo 61.8%) and 1.2874 (daily cloud base).

Daily MA's turned into bearish configuration and momentum heads south and deeper into negative territory, support negative scenario.

Broken cloud top / 30SMA mark solid resistance at 1.3012, with extended upticks expected to hold below broken 20SMA (1.3070).

Res: 1.2988, 1.3012, 1.3054, 1.3070
Sup: 1.2963, 1.2904, 1.2874, 1.2811

UK PMI construction dropped to 52.1 in September, down fro 52.9 and missed expectation of 52.6. The key points are "all three sub-sectors record a loss of momentum", "solid increases in new work and employment", but "business optimism at second-lowest level since February 2013".

Tim Moore, Associate Director at IHS Markit and author of the IHS Markit/CIPS Construction PMI®:

"UK construction firms experienced softer output growth during September, with house building, commercial and civil engineering all losing momentum. A lack of new work to replace completed projects meant that civil engineering saw an overall decline in activity for the second month running and remained the main laggard.

"There were mixed signals in terms of the near-term outlook. New order books strengthened to the greatest extent since December 2016, which indicates that construction workloads remain on an upward trajectory. Rising demand and tight labour market conditions led to robust job creation, with survey respondents commenting on a larger-than-usual uptake of apprentices in September.

"However, latest data showed that overall confidence about the year-ahead business outlook was among the lowest seen since the start of 2013. Construction companies continued to note that political uncertainty acted a key drag on decision-making, with Brexit worries encouraging a wait-and-see approach to spending among clients. The main areas reported as likely to see a boost in the coming year were construction work related to large-scale energy and transport projects."

Full release here.

The Aussie dollar fell below 0.72 handle after Australian central bank left interest rates unchanged at 1.5% in October meeting.

The action was widely expected, increasing expectations that rates will remain low for an extended period as inflation is not expected to rise much and labor market will need time to tighten.

Fresh weakness broke below key supports at 0.7200 zone (20SMA/low of two-day consolidation/50% of 0.7085/0.7314 upleg), signaling extension of pullback from 0.7314 (26 Sep correction high).

Firm break below 0.72 handle would risk further weakness and test of pivotal support at 0.7172 (Fibo 61.8% of 0.7085/0.7314 upleg), break of which would confirm reversal and re-focus key support at 0.7085 (11 Sep low).

Momentum is in steep descend and about to break into negative territory, supporting negative scenario, however, oversold slow stochastic may slow bears.

Broken 30SMA (0.7227) is expected to cap and maintain bearish pressure.

Res: 0.7203, 0.7227, 0.7243, 0.7268
Sup: 0.7185, 0.7172, 0.7139, 0.7100

The dollar eases from new nearly 11-month high at 114.06 on Monday, taking a breather after three weeks of strong rally, which resulted in break and close above pivotal barriers at 113.22/30 (weekly 200SMA/Fibo 61.8% of 118.66/104.63 fall). Bulls now look for test of next key barrier at 114.73 (06 Nov 2017 high), with current easing seen as positioning for fresh advance. Broken pivots (Fibo 61.8%/weekly 200SMA) should ideally contain dips to keep immediate bulls intact, however, strongly overbought daily slow stochastic warns of deeper pullback towards pivotal supports at 113.00 zone (rising 10SMA/sideways-moving daily Tenkan-sen). Only break here would sideline bulls and allow for deeper correction which could extend towards rising 20SMA (112.29).

Res: 113.64, 113.74, 114.00, 114.36
Sup: 113.68, 113.30, 113.18, 113.00