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by Charalambos Pissouros

Italy’s Government Faces Confidence Vote, GBP Awaits for Services PMI; Aussie Unfazed After RBA

Market 08

Italy’s New Government Faces Confidence Vote; GBP-Traders Await for Services PMI

Following last week’s recovery amid signs of stability in Italian politics, the euro traded mixed against the other G10 currencies on Monday. It underperformed against SEK, NOK, NZD and AUD, while it gained against GBP, JPY and CHF. The common currency traded virtually unchanged against USD and CAD.

EUR perf 0506181

Last week, Italy's Five Star and League parties agreed to resurrect a coalition, averting the scenario of new elections. Today, the new government will face a confidence vote in parliament, and with the two parties holding a majority in both houses, the coalition is expected to win.

However, the uncertainties surrounding the euro area are far from eliminated in our view. Although fears over Italy exiting the Eurozone have subsided recently, with the new Economy Minister saying that none of the parties want to leave the bloc and neither does he, there are still concerns over the new government’s fiscal plans and how it will interact with the European Union.

Remember that a couple of weeks ago, Italian markets took a hit on fears that the spending plans of a potential Five Star – League government may explode the nation’s already huge debt pile and perhaps breach the EU’s budget rules. Therefore, a potential conflict between the new government and the EU could bring the idea of a euro exit back into the limelight. What’s more, following the US administration’s decision last week to impose aluminum and steel tariffs on the EU, euro traders are likely to keep an eye on trade developments as well.

The British pound was the currency that lost the most ground against the euro even after the better-than-expected construction PMI for May. The index remained unchanged at 52.5 instead of sliding to 52.0 as the forecast suggested. On Friday, the manufacturing PMI rose to 54.4 from April’s 17-month low of 53.9, helping the pound to gain during the day. However, the manufacturing sector accounts for only about 10% of the UK economy, and thus we think that market participants are likely to place more emphasis on the services index, due out today, given that the service sector accounts for 80% of the UK GDP.

UK PMIs 050618

Following the economic slowdown in early 2018, investors will be looking for hints on how the economy performed thereafter. Expectations are for a fractional increase to 53.0 from 52.8. Although the services PMI is likely the most important of all three UK PMIs, following the disappointment in the latest UK inflation data, we doubt that such a marginal increase will be enough to revive speculation with regards to a near-term BoE rate hike. We think that market participants would like to see a stronger increase before they put some hike bets back on the table.

EUR/GBP – Technical Outlook

EUR/GBP continues ranging without a clear indication over which direction the pair wants to head after. The pair is stuck between the 0.8695 level and the 0.8840 mark. Until it breaks one of the sides on a daily-close basis, we will remain neutral on the near-term outlook. As for the bigger picture, the pair is still within the downwards moving channel, that’s running from the end of September last year.

EUR/GBP is currently testing an important area of resistance at 0.8790, a break of which could open the path towards last week’s high of around 0.8810 mark. If after that, the buying still prevails, then we could see the pair moving towards the upper side of the aforementioned range, at the 0.8840 level. If that level is not able to withhold the rate from rising, then more bulls could join in and drive EUR/GBP higher.

Looking at our oscillators, the RSI is sitting above its 50 mark, which could be seen as a bullish indication. The MACD is also showing signs of strength by moving above both its 0 and trigger line, indicating that the potential could be more to the upside.

On the other hand, a strong move lower towards the 0.8725 level and eventually a break of it, could interest the bears in driving EUR/GBP to the lower side of the aforementioned range, at the 0.8695 area. A break of that zone could open the way for a quick test of the 0.8680 territory, which if broken, could clear the path towards the bottom side of the previously mentioned downwards moving channel.

2018.06.05 EURGBP 240 Logo

Another Non-event Meeting by the RBA

Overnight, during the Asian morning Tuesday, another RBA meeting ended with no fireworks and thus, the Aussie stayed unfazed at the time of the release. The Bank decided to keep interest rates unchanged at 1.50%, and once again it made very little changes to the accompanying statement.

RBA rates 050618

Policymakers repeated that one continuing source of uncertainty is the outlook for household consumption, and that inflation remains low. They maintained their upbeat view on the labor market but reiterated that wage growth remains low and this is likely to continue for a while yet, although the rate of wage growth appears to have troughed. They also reiterated concerns about the direction of international trade policy in the US, while they acknowledged the impact of the Italian politics on the financial markets.

Once again, the key take-away is that RBA officials are unlikely to turn their eyes on the hike button in the foreseeable future. According to the Bank’s latest quarterly Statement on Monetary policy, the cash rate is expected to increase around the middle of next year.

Now, Aussie traders are likely to turn their attention to the nation’s GDP data for Q1. Expectations have changed and now suggest that economic activity accelerated to +0.9% qoq from +0.4% in the last three months of 2017, something that could drive the yoy rate up to +2.8% from +2.4%.

GBP/AUD – Technical Outlook

GBP/AUD has been on a down-move since the pair reversed south on the 27th of April. GBP/AUD continues to hold to its downwards moving trendline taken exactly from the previously mentioned date. We could see a bit of retracement to the upside, but the near-term sentiment is still bearish.

As long as the aforementioned trendline is intact, we will stick to the downside potential. A break of yesterday’s low of around 1.7390 could take the pair towards the next good level of support at the 1.7265 zone. If that area does not hold, then we could see a move towards the 1.7100 level.

Certainly, before hitting all the aforementioned levels, GBP/AUD could make its way either towards the 1.7515 area and move lower from there, or the pair could test the downwards moving trendline and then move south again.

The RSI has bottomed below 50, while the MACD is below its 0 mark and trigger line, but shows signs of bottoming as well. These indicators support the case for a small recovery before the bears jump in again.

The alternative scenario could be the one where GBP/AUD finally breaks the aforementioned trendline and heads north. This would also mean that the pair has broken the 1.7670 resistance barrier and could be aiming for the 1.7750 mark or even the 1.7800 area.

2018.06.05 GBPAUD 240 Logo

As for the Rest of Today’s Events

During the European trading, we have the final services and composite PMIs for May from several European nations and the Eurozone as a whole. The preliminary estimates suggested that the economic moderation observed since the turn of the year continued, and the final prints are expected to confirm just that. Eurozone’s retail sales for April are also coming out and expectations are for an acceleration to +0.5% mom from +0.1% in March.

In the US, the final Markit services and composite PMIs for May are due to be released, as well as the ISM non-manufacturing index for the month. The market tends to pay more attention to the ISM index, which is expected to have risen to 57.9 from 56.8. The US JOLTs Job Openings for April are released as well.

As for the speakers, we have two on the agenda: BoE Deputy Governor of Financial Stability Sir Jon Cunliffe and ECB Governing Council member Jens Weidmann.

 

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