Talking Points – Euro, Budget, EU, Italy
- Rome and Brussels are headed for showdown over budget, investors hold breath
- Political clout of economic nationalists dwindling, economic forecasts look grim
- Euro likely to fall further, spread between German and Italian bond yields to rise
See our Euro forecast to learn what is likely drive prices through year-end!
The Euro looks like it will continue its downward trend as uncertainty surrounding the Italian government’s controversial budget looms over investors. Brussels and Rome are headed for a budgetary showdown on November 13th.Economic nationalism has weighed the European unit down amid broader global risk aversion.
After the first draft was rejected, the EU Commission demanded a resubmission. The Italian government has affirmed it has no intention to radically alter its budgetary parameters. The regional authority is now sharpening its regulatory claws.
If Italy continues to break regional fiscal laws, they are required to follow a specific set of regulations known as the Excessive Deficit Procedure (EDP). This requires that they commit to a target that will bring deficits and debts back to statutory levels. If they cannot propose a fiscal plan within regulatory parameters, they face the possibility of economic sanctions.
This puts the EU in a conundrum: if their penalties are too harsh and push Italy into a crisis, it would strengthen nationalist eurosceptics. Conversely, if they are too lenient, it may provoke populists in other EU member states to push their own rule-violating agenda and justify it through citing Italy’s fiscal exceptionalism.
Financial markets have responded with risk aversion as the spread between German and Italian bonds widened. The increased political risk may cause a rise in demand for regional alternatives such as the Swiss Franc. If broader risk aversion follows, the Yen may also rise.
Rome is not likely to back down anytime soon or implement any meaningful reform due to the domestic risk of losing local voter support which has also begun to dwindle. This comes amid weak economic data from last month and the EU’s low forecasts for growth in Italy in 2019 and 2020.
The EU’s hard stance on applying uniform regulatory measures for all member states will continue to clash with Rome’s determination to push through their fiscal plan. That probably bodes ill for the Euro going forward.
EURO TRADING RESOURCES
— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitri on Twitter
Is Gold Posed to Lose its Luster?
GOLD PRICE FUNDAMENTAL FORECAST: NEUTRAL
- Gold’s recent bullish breakout may come under pressure despite strong safe-haven demand
- A strong US Dollar notching year-to-date highs to limit further advances in gold
- Prospect of a Federal Reserve rate hike pause could shoot the precious metal higher
GOLD PRICE FUNDAMENTAL FORECAST: NEUTRAL
Over the last 5 days of trading, XAUUSD declined 0.72% as investors anxious over slowing global growth sent the US Dollar higher. Although risk-off sentiment should send the precious metal higher, gains in the Greenback overpowered bullish bids for gold. A higher US Dollar makes purchasing gold denominated in America’s currency relatively more expensive thus limiting upside.
Looking to next week, focus will shift to the Federal Reserve as markets await the highly anticipated decision by the central bank’s Federal Open Markets Committee on monetary policy. Markets are currently pricing a 77 percent chance that the Fed will raise its benchmark policy interest rate for the fourth time this year according to the futures market implied probability.
In general, Gold has an inverse relationship with interest rates due to the precious metal not yielding any cash flows like debt instruments. Higher rates result in weakened demand for the commodity as alternative assets such as US Treasuries provide a higher rate of return. If the Fed surprises markets and pauses next week or makes any material downward change to the Fed’s dot-plot, gold could ascend quickly on back of lower future interest rate expectations.
Eyes will also closely watch for the release of several key economic indicators out of America next week. If actual results miss expectations, risk-off sentiment should continue and further boost demand for gold. However, fears over a slowing global economy will incite further rotation of capital from stocks to bonds with investors flocking to the safety of US Treasuries.
For a list of global economic events and data releases, check out our real-time Economic Calendar.
As international buying of Uncle Sam’s bonds increases, foreigners must convert their currency into US Dollars. This drives up demand for the Greenback which becomes a headwind for gains in gold due to the inverse relationship between the two assets.
A third key driver to take note of that will determine gold’s next move higher or lower will be the performance of the Chinese Yuan. As the damaged Asian economy continues to experience downward pressure amid worsening economic data due to the ongoing trade war with the United States, the Dollar may appreciate further against its Chinese counterpart.
The importance of USDCNY to gold is seen in their strong negative correlation. Trade talks between the world’s largest economic powerhouses will largely drive returns for the currencies with the CNY benefiting from any progress President Xi can make with President Trump towards de-escalation tension or reaching a deal.
Due to the mixed event risks and waning bullish technical indicators, the forecast for XAU will be neutral over the week of December 17. Take a look at client sentiment for insight on client positioning and trader bearish or bullish biases.
–Written by Rich Dvorak, Junior Analyst for DailyFX
–Follow Rich on Twitter for real time market updates @RichDvorakFX
Other Weekly Fundamental Forecasts:
Euro Shorts in Charge on Tri-break
EUR/USD Technical Highlights:
- Triangle finally broke, has Euro rolling downhill
- November low, Nov ’17 t-line initially targeted
- Must be cautious once at support, may put in floor
Let us help you. DailyFX has guides ranging from forecasts to trade ideas to education all in one location – DailyFX Trading Guides.
Triangle finally breaks, has Euro rolling downhill
Friday’s breakdown finally put the Euro outside of the triangle it had been forming over the course of the past month. It’s been an anticipated event, but confirmation was needed first before running with a more aggressive short bias.
Looking lower there is support not too far away. First up is the November low at 11215, followed by the lower trend-line extending over from November of last year; resides around roughly 11180. The way EUR/USD has been trading we’ll want to pay close attention to how it reacts once support is met.
The moves over the past few months haven’t been sustained for very long and this could be another unsustainable drive lower. With that in mind, from a tactical standpoint if the Euro starts to turn up from one of the aforementioned levels then it may be best to call it a wrap as a quick counter-trend bounce could develop.
If, however, selling pressure increases and a break below support unfolds, then perhaps a little momentum may kick in towards near 11100 or worse. It seems unlikely we will see too much power given not only the Euro’s behavior in past months but also because there is only about a week left in the year of full market participation before we go into ‘holiday’ mode. However, even as such, watch and follow the price action first.
Traders are generally long EUR/USD, see the IG Client Sentiment page to see how this acts as a contrarian indicator and is supportive of lower prices.
EUR/USD Daily Chart (Levels, lines to watch)
EUR/USD 4-hr Chart (Triangle broke Friday morning)
—Written by Paul Robinson, Market Analyst
You can follow Paul on Twitter at@PaulRobinsonFX
Other Weekly Fundamental Forecast:
Price Rally Pulls Back ahead of FOMC
Gold Weekly Technical Outlook: Price Rally Pulls Back ahead of FOMC
In this series we scale-back and look at the broader technical picture to gain a bit more perspective on where we are in trend.Gold prices snapped a three-week winning streak with the precious metal off by nearly 1% ahead of the New York close on Friday. Here are the key targets & invalidation levels that matter on the Gold (XAU/USD) weekly chart heading into the close of the year.Review this week’s Strategy Webinar for an in-depth breakdown of this setup and more.
New to Gold Trading? Get started with this Free How to Trade Gold -Beginners Guide
Notes:In my most recent Gold Technical Outlook we noted that price was, “responding to up-slope resistance and while we could see some near-term weakness, the focus remains higher while above within this formation” (channel formation in red). Gold is testing near-term support into the close of the week at 1234/36 where the 2017 December low converges on the 200-week moving average with more significant support seen at 1216/21– a region defined by the December open, the 38.2% retracement of the August advance and basic channel support. A break here would risk a larger setback with such a scenario targeting broader bullish invalidation at the yearly low-week close at 1184.
Initial resistance stands at the 50% retracement of the yearly range at 1263 with a breach above the highlighted slope confluence at 1270 needed to validate a larger reversal in price targeting 1287 and the 2018 open at 1302.
For a complete breakdown of Michael’s trading strategy, review his Foundations of Technical Analysis series on Building a Trading Strategy
The immediate threat remains for a deeper pullback IF price slips below 1234 but the medium-term focus remains higher while above 1216. From a trading standpoint, look for weakness to offer more favorable entries lower down near slope support.
Even the most seasoned traders need a reminder every now and then-Avoid these Mistakes in your trading
Gold Trader Sentiment
- A summary of IG Client Sentiment shows traders are net-long Gold – the ratio stands at +3.55 (78.0% of traders are long) – bearish reading
- Long positions are 1.4% higher than yesterday and 5.8% higher from last week
- Short positions are 2.0% lower than yesterday and 4.9% higher from last week
- We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Gold prices may continue to fall. Traders are further net-long than yesterday & last week, and the combination of current positioning and recent changes gives us a stronger Gold-bearish contrarian trading bias from a sentiment standpoint.
— Written by Michael Boutros, Technical Currency Strategist with DailyFX
Follow Michael on Twitter @MBForex or contact him at firstname.lastname@example.org
Other Weekly Technical Forecast:
Latest News5 days ago
Pot analyst says brewer Constellation is a top stock idea in 2019
Forex7 days ago
Kiwi Dollar Down Trend Back in Play?
Forex6 days ago
US Dollar Bounces from Support; EUR/USD Attempts to Break Congestion
Latest News5 days ago
ICEYE first image of Spain from all-seeing satellite constellation
Forex5 days ago
Dow Takes a Dip Into Breakdown Territory, Pound Stays There after Brexit Vote Cancelled
Forex7 days ago
Weekly Fundamental Forecast:Trade Wars are Heating Up, Brexit Faces a Fork, Fed Intent Blurs
Forex6 days ago
Sterling (GBP) Directionless – Will Meaningful Brexit Vote Take Place?
Latest News5 days ago
Indian tycoon Vijay Mallya faces extradition from the UK