- EUR/USD bulls are guarding a break below the wedge’s support with the confluence of a double bottom just below S1 located at 1.1455 and ended last week on a positive footing on promising Brexit headlines whereby the UK appears ready to drop Brexit demand on Irish border in order to facilitate a deal.
- At the same time, there was a key bearish reversal in Italian bond yields when the EU softened their criticism of the Italian budget. EUR/USD ended the NY day at 1.1516 in a bullish engulfing corrective daily candlestick.
EUR/USD has opened a very quiet Asian session steady and has moved between 1.1512/18 so far. There is quite a number of things priced into the unit on the political front as well as global growth factors where the euro tend to pick up a risk on bid when the ebbs and flows of sentiment for the macro outlook swings less negative. The most recent positive was a key bull reversal in Shanghai’s markets despite a miss in China’s Q3 GDP on a yearly basis – ( YY, 6.5%, 6.6% forecast, 6.7% previous – QQ SA, 1.6%, 1.6% forecast, 1.7% previous). China’s securities regulator was reported to be seeking to support market confidence with new measures which helped to relieve some concerns.
A softer Brexit outlook
Closer to home, Brexit is increasingly looking as though an Autumn deal will be on the table at the ‘cost’ to Brexiteers having to give way on the Irish border with an extended transitionary period – a period designed to smooth the path between the UK leaving the EU in March 2019 and a future long-term relationship with Brussels.
However, the pound is not out of the woods on this yet, as this is going to be problematic for PM May who is facing a vote of no confidence from her own party, and must attend a meeting of the 1922 committee of Conservative backbenchers this week. She faces disputes from the likes of Ex-Tory leader and prominent Brexiteer Iain Duncan Smith who is saying that May is taking Britain towards a deal that would see the UK paying the EU “tens of billions” more. “The negotiations “look more like a capitulation,” he argued.
Italian budget risk could be long and drawn out
Meanwhile, despite the slightly less negative sentiment on Friday with respect to the EC and Rome, Italy is fully expecting the EU to reject its 2019 budget on Tuesday as it violates EU fiscal rules – Something well telegraphed, but the legal procedures in this will take us right into the end of the first quarter – Firstly, the Commission will have until Oct. 22 to make its concerns known to Italy Brussels and would have to explain in a written opinion its reasons for sending the budget back to Rome for changes. We will then look to “remember, remember, the fifth of November” when the Eurogroup of eurozone finance ministers holds a regular monthly meeting which would put further pressure on Rome to change its draft budget. The Italian government would have three weeks from the date of the EU opinion to submit a revised budget. This deadline would expire on Nov. 19th – If Italy refused to change its draft budget, the Commission could open an excessive deficit procedure against Rome and that is when European markets will likely get the most interesting again.
ECB this week
Focusing on the here and now, we have the ECB this week, although perhaps not so significant because of the strong forward guidance that is already priced in. However, we do have the press conference Q&A session this time around, where a few questions on Italy or the inflation outlook may capture the market’s attention as analysts at Nomura pointed out:
“As we deem it much too soon for the ECB to signal any need to step into the Italian debate beyond what it has already said, we think there is a low risk that the ECB will spark an acceleration of the recent BTP weakness. So rather than the latest soundbite from the ECB, EUR’s fortunes will instead rest upon developments in China, Italian politics and the overall global risk environment.”
Moving back to the dollar and China, the analysts argued that, as they expect further USD strength with CNH breaking above 7.0, it is hard to be optimistic about EUR strength in the short term and range trading will likely continue. “The Italian drama has weakened the basic balance and led to outflows, but next year when the ECB looks to normalise monetary policy we expect EUR strength to follow it.”
EUR/USD and watching EUR/JPY levels
Given the number of political risks sewn up in the price, it would be prudent to monitor EUR/JPY and equities (there is a solid correlation between the two). We have seen price action driven by flows through EUR/JPY of late and its make or break time for EUR/JPY bulls that are testing the bearish channel resistance in the 129.50’s on a pullback from a test through the 50% retracement of the mid-August lows to the late Sep multi-top highs in the 132.50’s. Capitulation at this key resistance would open a break of the 50% retracement level and then the double bottom lows for a test of the bull’s commitments at 128 the figure (key 61.8% Fibo) – A subsequent break there would damage the bullish case for EUR/USD. As for EUR/USD, the triple bottom lows of 1.1433 guard 1.1422 as the 76.4% Fibo of the 1.1301-1.1815 range ahead of 1.1395 (Aug 20th low) and then the 17th Aug low at 1.1367. On the flipside, and according to the 4hr bullish technical outlook with respect to bullish RSI and MACD, a run towards R1 at 1.1556 will drag the ADX into bullish trend territory and bulls can target a recovery through the 1.1551 hourly cloud top and then to 1.1596 for a potential run through the 1.16 handle.
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