RECAP

A very innocent European session with most asset classes holding in tight ranges. The USD gradually moved higher across the Group-of-10 FX, as the GBP was lifted during the Asian trading session after reports of opposition support for Chequers plan. The NOK rallied after higher than expected CPI, and the yuan was unresponsive to Mnuchin warning on devaluation.

The Italian equity markets were also relativity subdued with BTP futures close to yesterday’s high. The European equity markets generally held onto small losses, while the Italian FTSE MIB traded flat as Italian bank stocks bounced from a recent heavy selling.

Core fixed income markets were pushed marginally lower, as the UST curve was slightly steeper with a large volume in December 116.5 UST puts noted as hedging flow before supply and CPI.

In the key headlines for the European session:

  • Mnuchin warns China on competitive currency devaluations; Treasury has monitored currency issues “very carefully”; notes yuan has “depreciated significantly” during the year: FT
  • Italy: Finance Minister Tria says budget watchdog approved govt economic forecast, however, had a different view on growth targets; rise in BTP yields are an excessive reaction
  • BOE’s Haldane: risks to domestic prices are now broadly balanced; U.K. wage growth is likely to be limited and gradual
  • Brexit: a group of 30-40 Labour MPs is prepared to back Chequers deal, according to people familiar: Times
  • ECB’s Mersch: tightening labor market should support core inflation; reiterates ECB will be data dependent

OUTLOOK

The European market was dominated by the relative calm markets compared to the last couple of days where we saw most equities fall heavily on the concerns of the Italian crisis. What’s more, the economic news day was rather bare, with most investors gaining optimism from the U.K. front were some opposition members have sided with the Chequers plan giving a boost for the GBP.

Moving on to the U.S. session, the government is set to auction off another round of bills focusing this time around on the 3-year and 10-year notes. In Economic News, the PPI and Core PPI are set to be released today which the wholesale inventories, the prior being the more important indicator to look out for as it measures another aspect of inflation.

In Fed speakers for the day, we have Chicago Fed President Charles Evans (alternate voter), and Atlanta Fed President Raphael Bostic (voter), who both are considered to be Moderate Doves implying that the aspect of Monetary Policy clues is going to be on the soft side.

TRADERS VIEW

The dollar reversed an early decline as Treasury yields edged higher, while another drop in Italian bonds kept the euro under pressure. Sterling held near month-to-date highs amid growing optimism that a compromise Brexit deal may be reached, with front-end volatility in pound crosses meeting a decent bid. The krone led gains in G-10 on stronger Norwegian inflation. European stock markets spent another day in the red.

EUR/USD – Following a daily DeMark buy setup, forms a long-legged doji, indications of mean reversal; the overall picture remains bearish as price action develops below the cloud.

GBP/USD – Forms a bearish harami on the daily yet bulls show no fear as they look to challenge Bloomberg Trender Indicator at 1.3171 and alter the pound’s bearish trend since Sept. 20; strong resistance at 1.3218.

USD/JPY – Healthy correction unfolds, as 21-DMA support tested; weekly picture remains bullish, 200- weekly MA at 113.18.

AUD/USD – Close above 0.7085 needed to establish a basis for relief rebound.

EUR/CHF – Bullish trend exhaustion signals keep accumulating as a bearish engulfing line formed Monday; 55-DMA support in sight.