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by Charalambos Pissouros

EUR Rebounds on New Italy Headlines, GBP-Traders Eye May’s Speech

The euro rebounded overnight following reports that Italy’s government now plans to gradually reduce its budget deficit in the coming years. The pound sold off ahead of Boris Johnson’s speech, but rebounded somewhat thereafter. Focus for pound traders remains on the Conservative Party Conference, with PM May holding a speech today.

EUR Rebounds on New Italy Budget Headlines

The euro traded higher against most of its G10 counterparts. It gained against AUD, NZD, SEK, GBP, and CAD in that order, while it traded virtually unchanged against USD, CHF and NOK. The euro lost some ground only against JPY.

EUR performance G10 currencies

Once again, the big theme for the common currency was Italian politics. The currency started the day on the back foot and accelerated somewhat to the downside after Claudio Borghi, who leads the economic policy of the Northern League Party and heads the budget committee in the Italy’s lower house, said that he was convinced that Italy would solve most of its problems if it had its own currency.

His comments sparked a selloff in Italian assets, as well as the euro. He tried to calm the markets later in the day by saying that leaving the euro is not in the government’s program, while PM Giuseppe Conte said that “euro is our currency” and that any other opinion on the currency has nothing to do with the policies of the government.

The remarks stabilized somewhat the Italian markets but were not enough to trigger a decent recovery. Italy’s FTSE MIB ended another day in the negative zone, while the nation’s 10-year government bond yields surged 5.56% yesterday, hitting their highest level since March 2014. The spread between Italian and German 10-year yields, a widely watched indicator of Eurozone political tension, widened to 303.3 bps, hitting levels last seen in May. The broader market sentiment was affected as well. The dollar and the yen enjoyed safe-haven inflows, while riskier currencies, like AUD and NZD, sold off. What’s more, most major EU and US equity indices ended Tuesday’s session in the red. The exception was Dow Jones, which closed 0.46% up, hitting a new record high.

Having said all these though, the euro rebounded overnight to recover Tuesday’s lost ground, and traded even higher following a report that Italy plans to gradually reduce its budget deficit target to 2% in 2021. Last week, the Italian government set out a deficit target of 2.4% of GDP for the next three years with several EU officials opposing the plans. Thus, the overnight report, if true, is a sign that Italy has softened its stance and it is now ready to follow the rules of the EU, something that may provide some market to European markets today.

As for the euro, even if it continues its relief recovery for a while more, it is too early to say that everything is resolved and that this was the bottom. Italy is set to submit a draft proposal to the European Commission by the middle of the month and any headlines suggesting that EU officials could still reject the plan may well weigh on the common currency and the Italian assets again. On top of that, there is a big risk for rating agencies to downgrade the nation’s debt later this month.

EUR/JPY – Technical Outlook

Yesterday, the euro got a boost across the board and managed to jump against all of its major counterparts, except the Japanese yen. The pair went down and tested the short-term upside support line drawn from the low of the 15th of August, from which it rebounded back up, giving some hope for the EUR/JPY-bulls. As long as the upside remains intact, we will stay cautiously positive for now, and aim slightly higher.

A strong move back above the 132.00 hurdle, could attract more bulls again, who could lift EUR/JPY to test the 132.45 level, marked by Monday’s high. If the buying continues, a break of the Monday’s high could open the path towards the 133.10 zone, which acted as strong resistance throughout last week. This is where the rate could stall initially, but if the bulls remain in the driver’s seat, then we could see EUR/JPY continuing its way higher.

The RSI and the MACD are not giving us a clear picture yet. The RSI, even though it shifted upwards after bottoming near the 30 zone, continues to hang below the 50 line. The MACD is somewhat positive, as it is above its trigger line and pointing higher but remain below zero.

Alternatively, a break below the aforementioned upside support line could raise concerns in the bull-bloc over the upside potential. But for us to get comfortable with the downside scenario, we need to see a close below the 130.70 area, marked by yesterday’s low. This is when it could become interesting for the bears, as more of them could start joining in and driving EUR/JPY towards the 129.80 level, which acted as strong resistance between the 5th and the 13th of September. If the selling doesn’t stop there, the pair could easily slide to the 128.90 area, marked by the low of the 12th of September.

EURJPY 4-hour chart technical analysis

UK Conservative Conference Continues, Eyes are on PM May’s Speech

The pound was lower against most of its G10 peers yesterday. It gained only against AUD, NZD and SEK, while it depreciated the most against JPY, CHF and EUR.

GBP performance G10 currencies

The British currency was trading in a sliding mode ahead of Boris Johnson’s speech at the UK Conservative Party annual conference, perhaps on fears that he may challenge Theresa May’s leadership. However, this was not the case. Yes, Johnson criticized May’s Brexit plans, saying that this is the moment to chuck Chequers, but at the end of his speech, he called on the party to support May and her original plan, not Chequers.

The pound rebounded somewhat after Johnson’s speech, perhaps as market participants priced somewhat out the likelihood of a leadership challenge. However, with PM May insisting that Chequers is the only credible Brexit solution, focus for pound-traders is likely to stay on the Conference, which concludes today with Prime Minister’s address. On Monday, the pound spiked up following reports that PM May was ready to compromise on the Irish border issue, so it could be interesting to hear what she has to say on the matter, especially after the leader of Northern Ireland’s DUP, the party May relies on to keep her position, said that Northern Ireland must leave on the same terms as the rest of the UK.

GBP/USD – Technical Outlook

Yesterday, after a prolonged move lower, GBP/USD stopped and reversed from its short-term upside support line taken from the 15th of August. Even though the pair has experienced a lot of selling since the 21st of September, the rebound from the upside support line suggests that there may be some more recovery in the works for now. Thus, from the short-term perspective, as long as the abovementioned upside line remains intact, we will stay somewhat positive over the short term.

Although GBP/USD is trying to get back on the ladder, so that it could climb higher again, for us to get more comfortable with the upside, we would need to see a break and a close above the 1.3055 area, marked by the strong support of the 21st of September. This way, more bulls could start getting interested again and we could start examining previous resistance levels like 1.3115, which was the peak of the spike seen on Monday. If that level gets cleared, this could open the way towards the 1.3215 zone, marked by the high of the 26th of September.

Yesterday, the RSI has bottomed at the 20 zone, from which it comfortably moved back up and now is pointing towards the 50 line. The MACD, even though still below zero, has now shifted above its trigger line and also started pointing upwards. All this gives some hope for the bulls, who could take their chance in lifting GBP/USD.

In terms of the downside, for us to consider lower levels, we need to see a break and a close, not only below the aforementioned upside support line, but also below the 1.2940 support zone, marked by yesterday’s lows. This way we could start aiming for the 1.2895 level initially. That level held the rate from dropping lower on the 10th of September. Further declines could be possible if 1.2895 doesn’t hold, as more bears could see this as a good opportunity to jump in and drive the pair all the way towards the 1.2785 barrier, marked by the low of the 5th of September.

GBPUSD 4-hour chart technical analysis

As for the Rest of Today’s Events

Besides the Conservative Party Conference, pound traders are likely to keep an eye on the economic calendar and the UK services PMI for September. Expectations are for the index to have slid to have slid to 54.0 in September from 54.3.

In the US, we get the ADP employment report for September. Expectations are for the private sector to have gained 185k jobs, more than the 163k in August. This could increase bets that the NFP print, due to be released on Friday, may come close to its forecast, which is also 185k. That said, we must repeat that even though the ADP is the only major gauge we have for the non-farm payrolls, the correlation between the two time-series at the time of the release (no revisions are taken into account) has been very low in recent years. Taking into account data from January 2011, the correlation stands at around 0.44.

US ADP vs NFP Employment Jobs

The final Markit services and composite PMIs, as well as the ISM non-manufacturing index, all for September, are also due out. The Markit prints are forecast to confirm their first estimates, while the ISM index is expected to have declined to 60.0 from 60.7.

As for tonight, we get Australia’s trade balance for August, and expectations are for the nation’s surplus to have declined to AUD 1.4bn from AUD 1.55bn.

We also have four Fed speakers on the agenda: Chair Jerome Powell, Richmond President Thomas Barkin, Cleveland President Loretta Mester, and Board Governor Lael Brainard.

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