Everything is right with the world again. Well it’s not, but markets are fickle and just as they’ll overreact to potential downside risks/news as we saw on Tuesday, they can also get over excited on slightly more positive news flow or at times even no new negative news. That’s basically been the story of the last 48 hours, a slight rebound from Tuesday’s lows in EURUSD had already begun by the time we took our seats yesterday morning and that rebound continued through the day, with equity markets also gathering pace and covering much of Tuesday’s sell off with Europe, the USD and Asian trading sessions all trading firmer in the last 24 hours, covering much of Tuesday’s decline. EURUSD bounce took it from a key support area ahead of 1.1500 to rally back above 1.1700 this morning, a close above 1.1700 today and EURUSD could well find itself flying back towards 1.2000 so this is a development to watch closely.
Back to the primary driver for these moves and focus turns towards the ever evolving political situation in Italy. The pick-up in sentiment came after 5 Star withdrew their pick of Savona for Finance Minister, this is seen as a step back from aggression. Talk of a potential coalition deal further helping sentiment this morning which would help avoid a snap election in July. Nothing in this process is firm or fixed and we are almost certain to come across further speed bumps on this winding Italian road, after all this has been a long time coming and its far from over – Italy have been on the Eurozone risk radar for over 8 years at this point and the populist movements have now made their mark. Elsewhere in Europe, better than expected German CPI inflation would have played into some euro strength yesterday, Eurozone headline inflation is scheduled to rise to 1.6% and this highlights the European calendar.
The Fed’s “Beige Book” of economic sentiment was released yesterday and didn’t really offer up too many surprises. If anything it felt kind of muted. Moderate expansion continued in the economy, with manufacturing growth picking up pace. The outlook remains upbeat but concerns on international trade policy have been noted. The ADP employment report was slightly weaker than expected, Friday’s NFP is likely to be more interesting for the markets but there will be some focus on today’s PCE inflation readings.
Another area to be wary of today is the fact it is month end and we’ll be seeing the usual rebalancing trades with models suggesting USD supply. Big demand in EURUSD and GBPUSD is suggested, while some moderate USDJPY supply is also on the cards. The greenback rally may not yet be over and I’ll be closely watching what happens to the USD after 4.00pm this afternoon to see if it’s a month end move or a broader sentiment shift.
Should EURUSD close above 1.1700 today, there is scope for a press higher. There’s some pockets of resistance on the way up, 1.1750/55 up to 1.1800 but above there not much to stop the advance towards 1.2000 which interestingly is where EURUSD interest rate differentials would suggest their pair should be, any drop lower will almost certainly find support ahead of 1.1500 again.
Really not much happening in the UK this week, it’s been very light on data and with Brexit out of the headlines, the pound has almost been playing second fiddle. GBPUSD rebounded from lows just above 1.3200. As mentioned above large, GBPUSD demand into month end could well see this pair press higher into 4.00pm this afternoon but 1.3400/1.3450 area should hold the advance higher. EURGBP has been one of the most predictable currencies over the last month, .8800 holding any rally higher with .8780 a neater resistance level, while any drop towards .8700 has found buyers, with .8730 above that the neater line. Not much difference there today.