Forex news from the European morning session - 19 December 2018
Headlines:
- US MBA mortgage applications w.e. 14 December -5.8% vs +1.6% prior
- Saudi Arabia says that current oil price is not linked to fundamentals
- Dombrovskis confirms that European Commission has reached deal with Italy on budget
- UK December CBI trends total orders 8 vs 6 expected
- European Commission said to have decided to not open excessive debt procedures on Italy
- US and China are reportedly said to have clashed on trade at recent WTO meeting
- Eurozone October construction output -1.6% vs +2.0% m/m prior
- More from Hansson: ECB rate guidance won't change if economy follows baseline
- UK November CPI +0.2% vs +0.2% m/m expected
- Italian bonds cheer reports on end of budget deficit debate
- China says held phone call with US on issues of economy and trade
Markets:
- EUR leads, CHF lags on the day
- European equities higher as Italy leads gains; E-minis up 0.8%
- US 10-year yields flat at 2.817%
- Gold down 0.11% to $1,248.08
- WTI up 0.84% to $46.63
- Bitcoin up 7.90% to $3,814
There wasn't much eventful price action in currencies for the most part this session as markets stay entirely focused on the FOMC meeting decision to come later in the day. The dollar started off on the back foot but trading ranges remain relatively narrow.
EUR/USD was trading around 1.1385 to begin with before pushing higher to 1.1414 as the European Commission confirmed that it won't resort to excessive deficit procedures against Italy and that they have reached a resolution on the budget. Prior to that, gains in Italian bonds to start the day also helped underpin the single currency as it tested the 1.1400 handle. The pair now settles near the figure level ahead of US trading.
Meanwhile, a weaker dollar also saw GBP/USD move up from 1.2650 to a high of 1.2679 before the pair settled around the 1.2650 level again ahead of UK inflation data. The release was in-line with expectations and that failed to offer much for the pound but eventually the quid slipped late in the session as cable now trades near the lows for the day at 1.2630 levels.
There wasn't much action elsewhere as equities and risk sentiment failed to provide markets with much direction. Asian equities were mixed while European equities opened rather flat for the most part before surging higher as Italian bank stocks helped to lift the mood. Aside from that, E-minis traded steadily throughout the session between 0.6% to 0.8% higher on the day.
As a result, risk currencies are still trading in a rather narrow range for the day with AUD/USD settling between 0.7180-90 throughout the session and NZD/USD sitting between 0.6850-65 for the most part.
Treasury yields are also flat on the day and that isn't the mood in USD/JPY as the pair moved between 112.30-40 for almost the entirety of European trading. All eyes are on the Fed decision to come so it's not too surprising that markets are in a bit of a lull.
As for expectations ahead of the Fed decision, markets have priced in a certain amount of dovishness that is to be expected by Powell & co. later today considering how the dollar and yields have slumped since the start of the week. A rate hike is very much a given so if the Fed decides not to pull the trigger, expect a significant repricing in markets on that front.
As for a dovish take, it's likely to trigger further knee-jerk selling in the greenback but expect markets to calm down eventually as the Fed will likely view rate hikes in 2019 to still be appropriate although possibly scaling back on the pace of the tightening cycle.
Looking towards equities and risk sentiment, be a little bit wary on this part. Just because the Fed could signal a pause doesn't mean that things should move upwards in a straight line for risk. It'll come down to the Fed's reasoning at the end of the day. If it is due to neutral rates being reached soon, then that is the best reason for stocks to find a bid. However, if the Fed starts pointing its finger to global growth worries, US economic slowdown, and maybe hints of a recession or end of the economic boom cycle, then those are reasons for stocks to feel a bit worried as well.
