06-NOV-2018, TUESDAY

1) AUD/USD Prices Shrug Off RBA, US Elections May Cause Reversal
2) Euro at Risk as Italy Teeters on Weak Growth, Budget Clash with EU
3) GBP/USD Extends Bullish Sequence, RSI Threatens Trendline Resistance

1) AUD/USD Prices Shrug Off RBA, US Elections May Cause Reversal

The Australian Dollar was cautiously higher against its US namesake after the Reserve Bank of Australia left its overnight cash rate unchanged at 1.50%. The central bank noted that its unchanged policy is consistent with meeting its sustainable two percent inflation goal. The monetary policy authority also stated that it sees a gradual pickup in inflation and that GDP growth will average 3.5% over the next couple of years.

The jump in prices may initially continue AUD/USD’s breakout above its 2018 dominant downtrend following a resurgence in risk appetite. However, due to interest rate differentials and slowing Australian growth, upside follow-through is likely lacking. Furthermore, the Aussie Dollar has recently set a new yearly low at 0.7021, before it faced resistance at levels that were formerly support.

Looking ahead, the sentiment-linked unit will continue to closely eye risk trends. AUD/USD may face volatility from the US midterm elections, possibly leading to a bearish reversal as the Aussie follows market mood. In addition, the currency pair will also be looking to the FOMC rate decision and the RBA’s statement on monetary policy later this week.

2) Euro at Risk as Italy Teeters on Weak Growth, Budget Clash with EU

Italy’s controversial budget proposal has significantly contributed to an already risk-averse environment and exerted further downward pressure on the Euro. It has also led to the progressively widening spread between Italian and German 10-year bond yields. This reflects the added return that investors are demanding for what they believe to be the increasing risk of lending to Rome versus Berlin.

After the EU Commission rejected the Italian government’s budget proposal, they were asked to resubmit another draft by November 13. Prime Minister Guiseppe Conte has famously stated that there is “no plan B”, and the Italian government will not alter its fiscal stance. The tension between Rome and Brussels has been building for months and is not likely to fizzle out anytime soon as the Commission sharpens its teeth. If the government fails to implement substantive changes to their budget proposal, the EU officials have considered the possibility of publishing a report on Italy’s compliance with the regional bloc’s fiscal rules on November 21st. This was originally planned for the spring, and is likely intended to exert pressure.

If the report finds Italy in violation of EU norms, it could trigger what is known as the “excessive deficit procedure” and may result in sanctions. That would entail a financial penalty of 0.2% of the Italy’s economic output. This may push the already battered economy closer to the precipice of default. This comes on top of last week’s disappointing data from the Euro-Area and Italy. The region’s economy added 0.2% in the third quarter, falling short of the median estimate of 0.4%. Consumer confidence also took a hit, and a general pessimism around Europe’s future was further exacerbated when German Chancellor Angela Merkel announced she would not run for re-election in 2021.

Italian manufacturing substantially shrunk and economic growth stalled in the three months to September, undershooting estimates of 0.2% increase. The poor performance from these benchmark economic indicators is concerning investors who are skeptical of the government’s ability to push through a bold fiscal agenda. The Euro is likely to continue suffering from the growing uncertainty and tension between Brussels and Rome.

3) GBP/USD Extends Bullish Sequence, RSI Threatens Trendline Resistance

GBP/USD remains bid amid indications of an imminent Brexit deal, and the exchange rate may stage a large rebound ahead of the Federal Reserve meeting as it extends the series of higher highs & lows from the previous week. The limited reaction to the Bank of England (BoE) meeting suggests the Brexit negotiations will continue to sway GBP/USD over the near-term as the central bank warns ‘the economic outlook will depend significantly on the nature of EU withdrawal,’ and it seems as though the central bank is in no rush to implement higher borrowing-costs as ‘the contribution of external cost pressures, which has accounted for above-target inflation since the beginning of 2017, is projected to ease over the forecast period.’

Keep in mind, the BoE may continue to deliver two rate-hikes per year as ‘an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target,’ and signs of a smooth Brexit transition may fuel the rebound in GBP/USD as it puts pressure on Governor Mark Carney & Co. to start winding down the balance sheet.

At the same time, the Federal Reserve interest rate decision on November 8 may do little to sway the near-term outlook for GBP/USD as Chairman Jerome Powell & Co. are expected to retain the current policy, but the recent pickup in volatility have triggered a sharp shift in retail interest, with sentiment still holding near extremes. The development in the sentiment index suggests GBP/USD will continue to squeeze higher as sentiment appears to have peaked, with the Relative Strength Index (RSI) at risk of flashing a bullish signal as it appears to be threatening trendline resistance. Nevertheless, the ongoing skew in retail positionoffers a contrarian view to crowd sentiment especially as the exchange rate appears to be stuck in the broad range from the August to September period.