Euro rebound expected
Slow start to trading this Monday. EUR/USD dipped to 1.1574 as markets digested the weekend news flow around Brexit, soft EU CPI (Consumer Price Index) and the Italian budget. On Friday, Italian yields rose to a multi-year high of 3.20%, pressing the Euro lower. Investors are less afraid of the fiscal consequences of a 2.4% deficit, then a weakening relationship with Brussels and credit deterioration. USD firmed on last-minute NAFTA deal. The new USMCA (United States-Mexico-Canada Agreement) will replace the old NAFTA agreement.
In the European session, Italy’s public finances will dominate when the Eurogroup finance ministers meet today. It’s unlikely that we will see any market-moving headlines, however, as the meeting will focus on EU integration, specifically ESM reform. While the Euro looks to be suffering from a thousand cuts, we don’t see much additional upside in USD. The Fed increased policy rates as was universally expected, but the 10-year note yields actually fell — an indication that pricing for the Fed path is completely priced in. With limited support from the US yield curve, expect USD to weaken moving forward. Fading confidence in the next stage of USD bullish rally and short covering has allowed ZAR (South African Rand), TRY (Turkish Lira), and RUB (Russian Ruble), the most-sold Emerging Market currencies, to rebound impressively.
Brexit to weigh on the British Pound
We anticipate the sterling will see further selling heading into late October. Over the weekend, Boris Johnson attacked Prime Minister Theresa May’s Chequers plan calling it “deranged’ and “entirely preposterous”. The vicious attack indicated how divisive the subject remains. To secure support at this week’s Conservative Party conference, May is likely to take a hawkish stance in her keynote speech on Wednesday in Birmingham. Should May take a hard line, this will generate additional friction. We remain constructive on EUR/GBP watching for a reversal of weakness to regain the 0.9000 level.
