The EU summit kicks today, where the European leaders are ready to discuss a range of issues, as well as Italy and Britain. In the US, we get the minutes from the latest FOMC meeting. UK and EU are set to release their CPIs.
The EU summit kicks off today, where the European leaders are ready to discuss a range of issues, as well as Italy and Britain. Certainly, in regards to Brexit, it does not mean that a deal will be finalized during that summit, but the leaders are hoping it will help to progress further in the negotiations. Even though Italy is not really on the official agenda, still, it is believed that the Italian debt will be talked about.
On Monday, Italy has submitted its budget deficit plans on time to the European Commission and now will await for the response from Brussels. Brussels has the power to challenge the Italian budget plan and request certain amendments, which, no doubt, Rome will try to resist. It is not a secret that all this could lead to a stronger showdown between Brussels and Rome.
Just to remind the issue here, Italy’s new government had proposed to the European Commission their budget plan, where it says that Italy will increase its deficit to 2.4% of GDP. This is 3 times the limit that Brussels was expecting, as that was the number promised by the previous Italian government. The current Italian government is advocating that these measures are needed at the moment, as they could generate growth by 2020.
The EU commission has two weeks to review the Italian budget plan, but it is most likely that they will come up with requests to amend certain parts of the submitted documents. Certainly, the issue here could drag for months, as normally, countries are given several opportunities to comply with the European Commission.
After breaking its medium-term upside support line drawn from the low of the 14th of June, EUR/NZD could easily travel lower from here, given the fact that the New Zealand dollar continues to strengthen, and the euro is still struggling to make a move higher. Our oscillators are somewhat supporting the downside idea but started showing signs of bottoming. For now, we still remain cautiously bearish, until our key area of support at 1.7480 is broken.
As mentioned above, if the break of the 1.7480 zone happens, this is when we could get comfortable with the potential downside scenario. The next potential area of support that we could be on the lookout is the 1.7400 hurdle, which acted as strong support on the 29th of August and as good resistance around the 24th of the same month. If the bears will remain strong, a further drop could lead to a test of the 1.7350 obstacle, marked near the low of the 24th of October.
Alternatively, a move back above the aforementioned medium-term upside support line could half of the potential upside idea. For us to start examining the levels, that last time we saw in the beginning of October, we would need EUR/NZD to break above the 1.7660 level, marked near yesterday’s peak. This way we could start aiming for a possible test of the 1.7725 area, or even the 1.78075 zone, which was the high of the 12th of October.
Yesterday, UK released its unemployment figure, together with the average earnings. The percentage of people without work came out at 4%, the same as it was anticipated before the release. This is the lowest it has been since 1975. But the average earnings including bonus rose to +2.7%, which is one tenth of a percent higher than the previous and expected numbers. Average earnings excluding bonus performed slightly better, as they have gone up by two tenths of a percent, from +2.9% to +3.1%. The slight rise in earnings could be explained by the shortage in skilled labour force, which is quite an interesting fact. UK started experiencing labour shortages in industries like food production, as well as in high skilled office workforce. One of the main factors for leaving UK is the uncertainty surrounding Brexit.
Nevertheless, the GBP gained some strength against a few of its top currency counterparts, like USD, EUR, JPY and CHF. The only problem here is that the ongoing talks around Brexit and any news on the developments around that topic, could quickly change the sentiment in the British pound. That’s why the pound traders will be on the lookout for any news this week on the Brexit negotiation part.
The equity market-bulls managed to finally get a breath of fresh air, as we saw the indices rising and making its way north. Major US indices have jumped up and closed their trading sessions with a more than two percent gain. This was driven by the reaction to earnings, released by a few big companies, one of them which was Netflix. The company reported $0.89 earnings per share against a $0.68 estimate, which pushed the stock higher. Certainly, let’s not forget the sharp sell-off of the equity markets that we saw recently. That is why we will continue monitoring the indices with caution, for now.
In the US, we get the minutes from the latest FOMC meeting. At that meeting, the Committee raised interest rates to the 2.00-2.25% range and removed the part describing monetary policy as accommodative, which was interpreted as dovish by the market initially. However, at the press conference following the decision, Fed Chair Powell said that said that dropping the “accommodative” part does not signal a policy outlook change, but just that policy is proceeding in line with expectations. In the Q&A session, he added that the Fed funds rate is still below the neutral estimate of every Committee member, and that they plan to keep their future decisions data driven, instead of trying to figure out where precisely the neutral level of interest rates is.
The US equity markets closed in the green yesterday, mainly driven by good company earnings. From the technical side, the S&P 500 cash index continues to push north and seems like it is trying to make its way up to test the lower side of the rising channel that it broke out of on the 10th of October. If that’s the case, then we could see a follow through to yesterday’s bullish activity today, where the index could grind a bit more to the upside. Nevertheless, we will remain bearish overall, as long as the S&P 500 cash stays below the lower side of the rising channel.
The S&P 500 cash could go up and test the 2845 resistance area first, marked by the low of the 22nd of August, slightly above which, sits the lower side of the aforementioned channel that could get tested. If the index will struggle to get back inside the channel, this where the bears could see a good opportunity to step in and pull the S&P 500 back down to the psychological 2800 level, or slightly below that, to the 2795 hurdle, which was the inside swing high of the 11th of October. A further decline lead towards the 2740 barrier, marked by the low of the 15th of October.
Alternatively, if the lower side of the abovementioned channel breaks and the S&P 500 cash closes above 2877 level, this is where we could more bulls getting interested. More of them could start jumping into the action, where the index could then get lifted towards the 2900 obstacle, which was the inside swing low of the 27th of September. If the bulls remain strong, the further path could lead to the 2941 hurdle, marked near the all-time high.
During the European morning, we get the UK CPIs for September. Expectations are for both the headline and core CPI rates to have ticked to +2.6% YoY and +2.0% YoY, after rising to +2.7% and +2.1% the previous month. At its September policy meeting, the BoE kept rates unchanged at +0.75% and reiterated that an ongoing tightening of monetary policy over the forecast period would be appropriate, but any future rate increases are likely to be gradual and to a limited extent.
The Eurozone is also set to deliver their inflation numbers after the UK ones. The September core MoM and YoY CPIs are expected to come out in line with the previous ones, at +0.4% and +0.9% respectively. The headline YoY figure is also believed to be the same as previous +2.1%, whereas the MoM number could come out more than twice the last month’s number, at 0.5%.
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