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by Charalambos Pissouros

Italy Softens Stance on Budget, EU Leaders Seal the Brexit Deal

The common currency started the week on a positive footing, following news that the Italian government may be eventually willing to compromise with regards to its budget plans. That said, the currency reversed early gains, perhaps due to the disappointment in the German Ifo survey and Draghi’s remarks. Even though GBP-bulls did not open Monday with much excitement after EU leaders finalized the Brexit deal, the British currency managed to gain throughout the day.

Euro Up on Italy, Down on Draghi

After tumbling on the disappointing Euro-area PMIs on Friday, the euro ended Monday mixed against its major peers. It gained against CAD, NZD, JPY and AUD in that order, while it underperformed against NOK, SEK, USD and GBP. The common currency traded virtually unchanged against CHF.

EUR performance G10 currencies

The week started on a positive note for EUR-traders following Sunday remarks by Italian Deputy PM Matteo Salvini, who said “I think no one is stuck to it” when asked over the 2.4% budget deficit target. So far, the Italian government has been adamant that the target was not under negotiation. However, Salvini’s remarks gave markets the impression that Italy may be eventually willing to compromise, something that was further supported by a report on Monday that the deficit could be reduced to as low as 2%.

That said, the joy for EUR-bulls did not last for long. The common currency reversed the early-morning gains and traded even below its opening price against the US dollar. Perhaps, the disappointment in the Ifo survey for November and Draghi’s comments before the European Parliament’s Economic and Monetary Affairs Committee have turned investors' attention back to Eurozone’s slowing-growth signs. In our view, the ECB chief said nothing new. Once again, he acknowledged the recent loss in growth momentum, but noted that some of the slowdown may be temporary. He also repeated that he still anticipates bond purchases to end in December. His view was echoed by several ECB policymakers recently, including the Bank’s Chief Economist Peter Praet, somethign suggesting that the Bank is very unlikely to alter its plans for ending QE in December.

However, we expect EUR-traders to keep their gaze locked on economic data. Although they may be convinced that the ECB is not planning to delay the end of its QE program, further weakness in the data could increase concerns that interest rates may rise later than previously anticipated. This is likely to keep the euro under selling interest, at least heading into the next ECB gathering, which is scheduled for the 13th of December. Even though more signs of truce between the Italian government and the EU Commission could prove positive for the common currency, any gains are likely to stay capped if Euro-area economic indicators continue to come in on the soft side.

EUR/USD – Technical Outlook

EUR/USD continued moving lower, but yesterday it found support again near the 1.1325 barrier, which was last week’s low. The pair is still below its short-term downside resistance line drawn from the peak of the 20th of November, so as long as that line remains intact, we will aim for lower levels.

If EUR/USD breaks the 1.1325 area on the third test, this might open the door to the next potential area of support at 1.1300, which already has become somewhat of a psychological level. Certainly, if the selling momentum remains strong, the pair might treat that psychological level only as a pit-stop and continue falling towards the 1.1263 hurdle, marked by the low of the 14th of November.

Alternatively, if the previously-mentioned short-term downside resistance line breaks and EUR/USD goes on and emerges above the 1.1385 obstacle, marked by yesterday’s high, this could spark hope in the eyes of the bulls again. The pair could then get lifted towards the next potential resistance zone at 1.1420, which was the high of the 23rd of November. If that zone is not able to withstand the bull-pressure, a further rate-rise could drag the pair to test the 1.1472 obstacle, or even the psychological 1.1500 barrier, marked by the high of the 7th of November. The 1.1500 level will be a key one to watch, because if EUR/USD doesn’t stop there, it might confirm an inverted head-and-shoulders formation, which could lead the pair towards much more higher areas.

EURUSD 4-hour chart technical analysis

EU-UK Seal Brexit Deal, Parliament the Biggest Hurdle

Switching channel to the Brexit sequel, the EU and the UK finalized the Brexit deal at a special EU summit over the weekend, but given this was something broadly expected, the pound did not react much at Monday’s open. It did however gain against most of its major pears throughout the day.

GBP performance G10 currencies

EU leaders were unanimous in endorsing the deal, saying that it is the best one possible and that it cannot be renegotiated if it fails to pass through the UK Parliament. In our view, this makes things back in the UK even harder. The Parliament vote is likely to take place on the 11th of December and until then, PM May has to convince MPs to back the deal, which appears the unlikely scenario at the moment, given the opposition from all sides. With EU leaders noting that the accord cannot be renegotiated, we believe that the conditional probability for a disorderly exit in case of a Parliament rejection has now increased.

As for the pound, we still expect it to stay anchored to news surrounding the Brexit landscape, especially as we get closer to the Parliament vote. Headlines enhancing the case for the deal to be rejected in Parliament are likely to keep the pound under pressure but given that market participants are already aware of how hard is for the deal to survive there, such headlines may have a smaller impact than previously. On the other hand, anything suggesting that the Parliament has softened it stance and that the deal’s approval is becoming more likely could come in as a positive surprise for GBP-bulls, who may start buying the currency massively.

GBP/CHF – Technical Outlook

GBP/CHF continues to balance above its near-term upside support line drawn from the low of the 7th of September. At the same time, the pair got stuck in a small range between the 1.2765 and 1.2835 levels. Even though GBP/CHF, at the time of this analysis, is declining, this could be classed as a correction before the pair moves back up again. If the above-mentioned upside support line remains intact, we will stick to the upside.

A drop below the 1.2765 area could temporarily invite more sellers, who might drag GBP/CHF a bit lower, to test the upside line, which could act as a good bouncing ground if not broken. This is where the bulls could start coming into action in order to drive the pair back up again to test the 1.2765 hurdle, a break of which may send GBP/CHF higher to test the upper bound of the previously-mentioned range at the 1.2835.

On the other hand, if the aforementioned short-term upside support line doesn’t hold and GBP/CHF drops below the 1.2700 obstacle, marked by the low of the 22nd of November, this may spook the bulls and lead the pair towards a further decline. GBP/CHF could then target the 1.2645 zone, or even the 1.2625 area, which held the rate from closing lower between the 10th and the 21st of September. 

GBPCHF 4-hour chart technical analysis

As for Today’s Events

The economic calendar appears relatively light today in terms of economic indicators. The ones worth mentioning are the US Conference Board consumer confidence index for November and the American Petroleum Institute (API) weekly report in crude oil inventories. The consumer confidence index is expected to have declined to 135.9 from 137.9, while as usual, no forecast is available for the API figure.

As for the speakers, we have five on today’s agenda: ECB Executive Board member Yves Mersch, Fed Vice Chair Richard Clarida, Chicago Fed President Charles Evans, Atlanta Fed President Raphael Bostic, and Kansas Fed President Esther George. Following the latest round of dovish remarks from several FOMC members, including Clarida, market participants scaled back their expectations over how many times the Committee is likely to hike through 2019. Thus, it would be interesting to hear whether (or not) Bostic and George are on the same page as their colleagues.

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