EUR price and analysis:
- As the UK prepares for Brexit and Italy argues with the EU over its Budget, the Euro is suffering.
- It could weaken further if there are signs that other countries are thinking of following the UK’s lead.
- Here are some of the other nations that might decide to head for the exit door, or be ushered out of it.
More countries might want to leave the EU after Brexit
Traders in EURUSD and the Euro crosses would do well to look out for any signs that other countries are thinking of following the UK’s lead and leaving the bloc, particularly if the UK secures good Brexit terms with Brussels.
Inevitably, at the top of the list is Italy, which is currently arguing with the EU over its proposed high-spending Budget that the EU has already rejected once. Unlike the UK, Italy is a member of the Eurozone so any move towards the exit – Italexit or Quitaly – would likely have a direct impact on the Euro, which has been weakening against the US Dollar since mid-April this year.
EURUSD Price Chart, Daily Timeframe (January 1 – November 15, 2018)
Chart by IG
So far, the Italian coalition government – led by the populist League and the anti-establishment Five Star Movement – has been adamant that Italy will not leave either the EU or the Eurozone, with Prime Minister Giuseppe Conte telling journalists in October: “Read my lips: for Italy there is no chance of Italexit, to get out of Europe or the Eurozone.”
However, it has refused to make significant changes to its high-spending Budget and could face an “excessive deficit procedure” that would lead to financial penalties. Given it is already mired in debt, the government could yet decide that Quitaly is the lesser of two evils.
The London-based betting company William Hill is quoting odds of just 2/1 that Italy will be the next country to leave the EU and the spread – or difference in yield – between Italian and German government bonds has jumped this year to more than three percentage points on concerns about Italy’s debt burden.
Italy/Germany 10-Year Yield Spread, Daily Timeframe (January 1 – November 15, 2018)
Source: Thomson Reuters Eikon
Which countries want to leave the EU
Elsewhere, Greece came very close to exiting the Eurozone – Grexit – in the summer of 2015, according to former French President Francois Hollande in an interview with Greek newspaper Kathimerini. Today, Greece’s debts are still high and the view that Greece might be better off outside the Eurozone has never gone away.
One risk is that Greek elections, which will be held on or before October 20, 2019, will result in a more Eurosceptic government after years of austerity and financial bailouts that have boosted Greece’s conservative opposition.
Considering which countries want to leave the EU, several others could potentially quit or be ejected, although the chances are low. Among them:
- Poland is arguing with the EU over a controversial reform of its judiciary and in a recent poll a third of those questioned said they rejected EU membership. The risk of Polexit was acknowledged in November by European Council President Donald Tusk, a former Polish Prime Minister, who told reporters: “The matter is dramatically serious. The risk is deadly serious. Polexit is possible”.
- Hungary is also in dispute with the EU, having been admonished by the European Parliament. Lawmakers said it was becoming an authoritarian state at the heart of Europe that encourages nationalists across the continent to follow the same path, and voted overwhelmingly in September to label Prime Minister Viktor Orbán’s government a “systemic threat to the rule of law”. Although unlikely, moves to expel it from the EU are possible.
- In Sweden, the right-wing anti-immigration Sweden Democrats became the third-largest party in the 2018 elections, leading to political deadlock. While they will not be part of any new coalition that is formed, their advance suggests that anti-EU sentiment is rising there too, despite a survey showing Swedes are still overwhelmingly against Swexit.
- In Estonia, the populist Eurosceptic EKRE party is gaining ground ahead of elections on March 3, 2019 and could become the third-largest party there. Once again, the chances of an exit are low but not insignificant.
- Euroscepticism is also high in the Czech Republic and politicians have called for a Czexit referendum.
Of course, this is all a long-term rather than a near-term risk for the Euro, but the chances of another country following the UK’s lead are certainly not negligible – and a risk that traders need to keep in mind.
More to read:
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Traders Net-Short Are 63.3% Higher from Last Week
TRADERS REMAIN NET-SHORT
US 500: Retail trader data shows 24.6% of traders are net-long with the ratio of traders short to long at 3.07 to 1. In fact, traders have remained net-short since Jan 07 when US 500 traded near 2473.53; price has moved 11.9% higher since then. The number of traders net-long is 1.7% higher than yesterday and 1.6% lower from last week, while the number of traders net-short is 5.2% higher than yesterday and 63.3% higher from last week.
For more in-depth analysis, check out the Q1 2019 Forecast for Equities
S&P 500 SUGGESTS STRONG BULLISH BIAS
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests US 500 prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger US 500-bullish contrarian trading bias.
— Written by Nancy Pakbaz, CFA, DailyFX Research
Follow Nancy on Twitter @NancyPakbazFX
On to the Next Big Levels of Resistance
S&P 500/Dow Jones/Nasdaq 100 Technical Highlights:
- S&P 500 nearing 2800-area, several swing-highs from last year
- Dow Jones 26k-ish stands between it and record highs
- Nasdaq 100 trading around resistance already
Check out the forecasts for Global Stock Indices and other markets on the Trading Guides page.
S&P 500 nearing 2800-area, several swing-highs from last year
The S&P 500 is continuing to show impressive strength since its v-bottom began the day after Christmas, with it having a few points along the way where it could have been stopped in its tracks. But it wasn’t, and this has levels prior to the December swoon in view. The area surrounding 2800 is a big one.
From 2800 up to 2817 there were three peaks created from failed rallies, a logical area, with the rally having come this far, to look for stocks to weaken from. Watching price action will be key, as always, but especially around the levels just ahead.
While resistance looks likely to get tested soon, the upward channel structure over the past month will keep stocks pointed higher for as long as it holds. If the S&P is rejected off resistance, to further bolster the notion of a sizable retracement we’ll need to see the underside parallel undermined.
For now, the top-side must be respected, but the time for material weakness may be nearing…
Stocks are rallying, but will it last in the long-term? Find out where our analysts see stocks headed in the Global Equities Forecast.
S&P 500 Daily Chart (2800/817 big spot)
Dow Jones 26k-ish stands between it and record highs
The Dow is nearing the 26k-area, a spot which is basically the equivalent of what 2800 is to the S&P 500. The zone runs up to near 26300. The focus is primarily on the S&P right now as it is the broader index, but depending on how price action plays out, the Dow may be the better index to short at some point if it shows relative weakness to the broader market.
Dow Daily Chart (26k-ish stands in the way)
Nasdaq 100 trading around resistance already
The Nasdaq 100 continues to lag behind, which is something to continue monitor given it was the bull-market leader with its leading group of stocks – FAANG – dominating price action and sentiment. The NDX is trading around the 200-day and near late-year swing highs equivalent to the ones discussed with regard to the S&P 500 and Dow. So far, relative weakness is making the 100 the preferred fade if the S&P finds material selling off resistance surrounding 2800/17.
Nasdaq 100 Daily Chart (trading around resistance)
To learn more about U.S. indices, check out “The Difference between Dow, Nasdaq, and S&P 500: Major Facts & Opportunities.” You can join me every Wednesday at 10 GMT for live analysis on equity indices and commodities, and for the remaining roster of live events, check out the webinar calendar.
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—Written by Paul Robinson, Market Analyst
You can follow Paul on Twitter at @PaulRobinsonFX
Aussie Dollar Falls on RBA Minutes, US-China Trade Talks Eyed
TALKING POINTS – AUSSIE DOLLAR, RBA MINUTES, ZEW, TRADE WARS, CHINA
- Aussie Dollar, commodity bloc FX down on downbeat RBA meeting minutes
- Germany’s ZEW survey may compound worries about slowing global growth
- Trade wars in focus on US-China negotiations, fears of US auto tariff hike
The sentiment-linked Australian, Canadian and New Zealand Dollars weakened in otherwise quiet Asia Pacific trade. The move appeared to be inspired by an ominous tone in minutes from February’s RBA policy meeting. Meanwhile, the US Dollar corrected gently higher.
RBA officials cited “significant uncertainties”, noting that trade tensions and cooling domestic demand have increased negative knock-on risks from China. They added that consumption may fall if domestic house prices fall much further. They suffered the worst drop since 1983 in the three months through January.
TRADE WAR DEVELOPMENTS, GERMAN ZEW DATA MENACE MARKETS
Looking ahead, Germany’s ZEW survey of analyst sentiment may compound the downbeat mood, especially if it echoes the disappointing trend in regional data outcomes since September. A small improvement in the forward-looking Expectations index is nevertheless expected to keep it within a hair of six-year lows.
The tone of US-China trade negotiations may also be formative as a delegation from Beijing arrives in the US for continued talks. Both sides painted a rosy picture earlier in the week, but the Trump administration may be preparing a spoiler as the President ponders raising auto import tariffs.
What are we trading? See the DailyFX team’s top trade ideas for 2019 and find out!
ASIA PACIFIC TRADING SESSION
EUROPEAN TRADING SESSION
** All times listed in GMT. See the full economic calendar here.
FX TRADING RESOURCES
— Written by Ilya Spivak, Currency Strategist for DailyFX.com
To contact Ilya, use the comments section below or @IlyaSpivak on Twitter
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