Economic data back on the agenda as Dollar edges higher

Today's news headlines:

  • ‘EU and Italy face off over populist government’s budget’. Unprecedented rejection of spending plan brushed off by Deputy Prime Minister Matteo Salvini. (The Guardian)
  • ‘Theresa May to face Tory critics at showdown meeting over Brexit’. The crucial meeting follows violent rhetoric from anonymous opponents. (Sky News)
  • ‘Trump says he “maybe” regrets nominating Jerome Powell as Fed Chair’. President accuses Chief of stunting economic growth. (NBC News).

The early part of the week has been dominated by a rather lacking economic calendar, leaving politics very much in focus. That tempo is set to change today, with a scattering of numbers scheduled for release in Europe which have the potential to provide some fresh direction for major currencies. However, with Italy being given three weeks to table a new budget by the EU, and Theresa May set to confront rebel Conservative politicians at the 1922 leadership committee, the political agenda will likely continue to dictate the market mood for some time yet.

The Euro is continuing to find itself under pressure as the stand-off between Rome and Brussels unfolds. By many accounts, the push-back from the European Commission over the Italian budget plays very much towards Rome’s agenda – the populist government has stated that they don’t want to leave the Euro, but if European leaders won’t allow them to deliver against election promises, then options become limited. In all likelihood, some compromise will be reached, but until that happens, the common currency may well find itself under a degree of pressure. Services and Composite Purchasing Managers’ Index (PMI) readings for the trading bloc are also set for release at 9am BST this morning – expectations are for a modest decline from the September readings, but anything suggesting a more notable slowdown for the Eurozone will have the potential to knock the currency further.

PMI data is also scheduled for release from the US, and with corporate earnings news disappointing yesterday, this figure could come in short. Arguably it’s the manufacturing print that carries the most political clout, and with Donald Trump’s harsh words towards Federal Reserve Chief Jerome Powell, the expectation has to be that the longer-term outlook isn’t all that upbeat. The Dollar index is continuing to march higher, but that move is still being fuelled by a flight to safe-havens. A big dip in any of the PMI readings would have the potential to see some profits being taken here.

Wednesday means Prime Minister’s questions in the UK, and Theresa May can expect another hostile reception from the opposition. However, it’s her meeting with the 1922 committee of Conservative MPs—the group who decides on the party’s leadership—which has the potential to be the biggest showdown. Political uncertainty has been weighing on Sterling of late, and anything that raises the idea of Mrs May being deposed as PM will be hugely troubling for the British currency.

GBP/USD

The pair spent the majority of yesterday’s session trading below 1.3000. However, anything that looks like support for Theresa May’s role as PM—at least in the short term—could initiate some gains later in the session.

EUR/USD

With the Italian budget question now sidelined for the next few weeks and key data releases due today, the Euro has the potential to find some fresh direction. The pair is holding close to two-month lows, but anything that serves to reinvigorate the debate as to the timing of that long-awaited European Central Bank (ECB) rate hike could provide support.

GBP/EUR

For the last two weeks, the GBP/EUR cross has been under pressure. Today could provide some respite depending on the outcome of Theresa May’s meeting with Conservative MPs and the outcome of the Eurozone PMI readings. Whilst the Italian budget question may be the proverbial elephant in the room, the market is going to take its lead from the pressing short-term issues.