ForexLive European FX news wrap: EUR/USD pares earlier gains as dollar strength creeps in

Forex news from the European trading session - 3 October 2018

Markets:


  • EUR and USD leads, NZD lags on the day

  • European equities trade higher, Italy leads gains

  • US 10-year yields up 1.1 bps to 3.074%

  • Gold down 0.06% to $1,202.70

  • WTI down 0.05% to $75.19

  • Bitcoin down 1.11% to $6,451



Ahead of the session, the euro was feeling perky following reports out of Italy saying that the government may reduce the budget deficit target in 2020 and 2021 to 2.2% and 2.0% respectively. EUR/USD traded to a high of 1.1594 in Asian trading and started European trading around 1.1570-80 levels.

The start of the session played out rather tepidly with only the pound being one of the early movers aided by bids in the euro. GBP/USD rose back above 1.3000 to a high of 1.3017 before tailing off back to the 1.3000 level soon after. UK services PMI produced virtually zero reaction and cable still stuck around 1.2990-00 after that.

But towards the end of the session the dollar gathered bids and bit by bit advanced against the rest of the major currencies. EUR/USD fell to 1.1550 levels initially before paring all of its earlier gains now ahead of US trading. GBP/USD saw a similar move falling to 1.2975 and then touching a low of 1.2963 where it trades just above currently.

The bid in the greenback was broad-based as it continued to weigh down the aussie and kiwi as well. Both commodity currencies already had a tough day/week and poor data from Asian trading certainly didn't help. AUD/USD traded around 0.7160-70 at the start of the session before moving lower to touch a low of 0.7145 in the last hour. NZD/USD traded similarly starting around 0.6570 before inching lower to lows of 0.6554 where it trades near at the moment.

USD/CAD was one of the steadier pairs despite the dollar strength seen in the last hour. The loonie continues to hold on to optimism from the USMCA deal and so far that is limiting losses for the currency on the day. The pair started off around 1.2820 levels before inching up and hit a high of 1.2844 before moving back to trade around 1.2830 levels currently.

Lastly, USD/JPY also saw little action as the pair continues to be driven by US Treasury yields. The yen is slightly weaker against the greenback in trading today as yields inched higher but with no clear break in yields from the current range the pair is also finding it tough to move above the 114.00 level for the time being.



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GBP/USD falls to session low as dollar firms up ahead of US trading

Cable falls to a low of 1.2963 on the day


Price now moves towards a test of yesterday's lows close to 1.2940. Theresa May is also speaking right now as she addresses the rest of her Conservative party but there isn't anything from her speech there to suggest much change to the Brexit rhetoric so far.

Right now, it's all about the dollar move with EUR/USD also falling to near the day's lows at 1.1543. AUD/USD and NZD/USD have also fallen to lows of 0.7145 and 0.6555 respectively.

As for cable itself, watch out for that daily support from the 19 July low @ 1.2958. If sellers can find a close below that and move below 1.2940, expect a further downside momentum to come in the pair barring any Brexit surprises.


It's going to be a tough two months for the pound as May tries to navigate through finding a way to strike a Brexit deal. Domestically, it remains to be seen if she can gather enough support from her own party. With the EU, she faces struggles as they're not willing to accept Chequers and she has to front alternative proposals - which are likely to be shot down since she won't deviate much from the original plans. And with the DUP, she's starting to lose their support too if she chooses to make concessions on the Irish border to try and satisfy the EU.



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EUR/USD starts to slip as dollar gains some traction on the day

The greenback is catching light bids ahead of US trading


The euro had already traded more tepidly with EUR/USD sitting at 1.1560-70 in the last hour but now we're seeing a further extension to the downside as the greenback starts advancing against the major bloc. GBP/USD has also fallen back to 1.2990 while AUD/USD and NZD/USD are touching session lows of 0.7150 and 0.6560 respectively.

It's been a case of sluggish trading throughout the session with major currencies refusing to break stride for the most part. The euro was underpinned by optimism from Italy's deficit target to be reduced over the next few years, but really they're just targets at the end of the day and right now still conjecture more than actual plans if you ask me.

With price unable to test offers at the 1.1600 handle or the 100-hour MA (red line), it's still suggestive of a continuation back to the downside as near-term price bias remains more bearish.

There isn't much to add to the market colour here with Treasury yields sitting mildly higher on the day. 10-year yields are up 0.9 bps to 3.073% but the dollar is still squeezing out some gains as we await US traders to come in to liven things up.



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AUD/JPY highlights the mood in markets so far today

The classic currency pair in determining risk sentiment is down by 1.1%


And that makes AUD/JPY the biggest mover in the major currencies space in trading so far. The pair is down by 90 pips in trading and is testing a key swing region support at around 81.40. And when AUD/JPY swing moves are the biggest among major currencies, almost every single time it'll be because of a shift in risk sentiment.

Today, it's all about the risk off mood in markets. Things started with the Hang Seng index moving lower after the lunch break falling by close to 2% and that sparked selling in S&P 500 futures too. The negative sentiment slowly turned into an even uglier one as Italy's budget worries once again added to market jitters and here we are right now.

Technically, AUD/JPY looks to be breaking below the 100-day MA (red line) @ 81.92 and if price manages to sustain a break back below the 81.40 handle then the downside bias will be more attractive in the coming days. However, a break below 81.00 will serve to add to that conviction even more otherwise that is another layer of support that needs to be broken first.

Subsequently, further support levels is seen at around 80.50 and the 80.00 handle before the year's lows at around 78.60 will come into focus. The issue with the risk off mood seen today is that there isn't much to have sparked it off at all in my view. And that makes for a good case for US trading to fade some of the moves here. But if we do get key technical breaks then it's hard to argue with that too and there it'd be unwise to challenge that notion unless the technical bias shifts back.



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EUR/USD extends decline, falls to lowest level in more than a month

The 1.1500 level is now being eyed


Risk off flows continue to see the dollar, yen and swissie pull further ahead on the day and the euro continues to be weighed down by that and Italy's budget worries. The single currency has now fallen to its lowest levels since 21 August against the greenback in trading at the moment.

The low for EUR/USD now touches 1.1513 with sellers eyeing a break of the support region between 1.1500-10. There isn't any large expiries rolling off to the downside today but there is one that will help to bolster the defence at the figure level which rolls off tomorrow worth €1.3 billion.

But right now, it's all about sentiment trading and notably the dollar and yen are staying well bid in European trading. The moves we're seeing here may be a bit overdone for the time being as losses sustained by European equities are not astronomical to say the least. Italy is leading losses and FTSE MIB is only down 1.2% currently.

However, sentiment is sentiment and you can't fight that. But I reckon markets will have to be wary and watch out for how US equities will perform later today. US equities have been known to fade moves like this so today could be one that plays out similarly too. We may not get a full recovery but at least the sentiment here may not be as sour as one may believe to be.

As for EUR/USD, if 1.1500 gives way then expect sellers to continue to build on that to drive price lower. The daily close will be important to watch in that aspect. One below 1.1500 will reinvigorate sellers to test the year's lows in the days/week ahead.



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USD/JPY falls to session lows as yen pulls further ahead on the day

USD/JPY touches a low of 113.67 on the day


The dollar and the yen are among the best performing currencies today but it is the latter that is leading the way by a margin at the moment. Risk off sentiment continues to dominate the market landscape and the yen is ramping up pressure across the major currencies bloc at the moment.

USD/JPY failed to break above the 114.00 handle and that for now will be the key resistance level for the pair in a bid to move higher. Key support is now seen at 113.17 from the July high.

It's all about risk in trading so far in the European session. The aussie and kiwi are the two currencies being battered heavily while the yen, swissie, and dollar lead gains. 10-year Treasury yields are down by 3 bps to 3.053% and that is also helping to keep the yen bid on the day too.

In my view, the real threat to any further upside in yen pairs is if Treasury yields slip further from current levels. If 10-year yields dip back below 3%, then that will derail the upside momentum seen in USD/JPY since the start of September.

But for now, stay above the 113.17 level and there is still a strong conviction for the upside move to continue. The 100-hour MA comes in at 113.44 so that will also be a key level to eye for. The 200-hour MA sits at 113.05 at the moment. As long as price holds above both of that, the near-term price bias remains more bullish still.



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USD/CAD falls to session low as loonie extends gains

The NAFTA/USMCA deal optimism is providing a tailwind for the loonie


Price looks to be attempting to break the daily support region around 1.2820 and touches a low of 1.2807 on the day. Sellers are now aiming towards the 1.2800 handle and if that fails to hold the next support region comes around 1.2720-30.

The loonie remains underpinned on the day on the back of a deal between US, Mexico, and Canada and that in turn is helping to underpin the Mexican peso and emerging markets against the greenback.

Currencies are rather mixed on the day with different themes dominating the developments of the major currencies so far today. But the main news is that of a NAFTA/USMCA deal and that has led to the loonie being the top performer.

And I expect things to continue in the same manner into US trading as well.



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EUR/USD remains pressured by Italian budget worries

EUR/USD trades at the lows for the day at 1.1570 levels


The low today touched 1.1574 and the euro remains one of the weakest performers alongside the yen on the day. After breaking below the trendline support and the 100-day MA (red line) last week, it's been a relatively straightforward move lower for the single currency.

And with Italy's budget deficit worries not likely to be resolved any time soon, expect any rallies in the euro to be met with offers unless something significant changes fundamentally.

As for EUR/USD, the momentum now favours a move to the downside with support seen at 1.1575 followed by the swing region around 1.1510-25. Beyond that, there are bids around 1.1500 to help limit any further decline.

However, the run lower here will be more of a marathon than a sprint. It's going to be a long October for the euro as Italy's budget worries don't look like they will go away any time soon and that casts a very dark cloud on the single currency for the month ahead.

For buyers, getting above the 1.1600 level would be the first step but breaking above the 1.1650 (100-day MA) level will be the key to break the bearish momentum. But given the continued pressure on Italian bonds, it's tough to see that happening for the time being unless the dollar comes under pressure.



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Italian bond rout deepens...

10-year yields are up by 27 bps on the day now


And they're up to their highest levels since 4 September. The move today is akin to that in late May when there were scares over the new coalition government. The euro is a little weaker on the day as a result of the situation in Italy but domestic assets are the ones suffering most following the budget announcement yesterday.

Italy's FTSE MIB is now down 2.6% on the day as well. Ouch.



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Italy leads losses as European equities stumble at the open

Italy's bank index is down by more than 5% to its lowest in more than two weeks


No surprises there considering the rise in bond yields seen earlier at the start of the session. The thing here is that we're seeing hints of a risk off tone in European equities with losses in other regional equity indices also rather glaring. However, the rest of the market remains unperturbed at this point with little reaction in currencies - apart from the euro - as well as in bonds - apart from Italy.



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