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I. Market focus
The main report of Wednesday’s morning session in the foreign exchange market was the news about the plans of the Italian government to reduce the budget deficit due to the European Union (EU) pressure. The government plan implies a gradual reduction of the budget deficit from 2.4 percent of GDP in 2019 to 2.2 percent in 2020 and to 2 percent in 2021. The main source of reductions will be spending cuts. The euro reacted positively to these reports, recovering from six-week lows against the U.S. dollar. After the beginning of the European session, the growth of the single currency may continue for some time, but it seems unlikely that the morning's positive news will be enough for a broad growth.
Prior to the news from Italy, New Zealand and Australia’s data were published, which turned out to be weak (commodity prices in New Zealand fell further in September, while building permits in Australia plunged in August). As a result, the currencies of both countries remained under pressure in the morning.
In the first half of the day, markets will focus on the UK’s data on activity in the country's services sector (08:30 GMT). The second half of the day will be busier with macroeconomic reports and events. The main data will be the American statistics on employment in the private sector from ADP (12:15 GMT), activity in the services sector from ISM (14:00 GMT) and crude oil inventories (14:30 GMT). In addition, four Fed representatives will speak today: Thomas Barkin (12:05 GMT), Lael Brainard (18:00 GMT), Loretta Mester (18:15 GMT) and Jerome Powell (20:00 GMT).
II. The market highlights are:
The U.S. Federal Reserve Chairman Jerome Powell said he sees no evidence that the U.S. labor market is at risk of overheating. In addition, he does not think that a sharp increase in price pressures is likely due to rising employment. He also rejected criticism that the Fed’s current projections of persistent low unemployment underestimate the prospect of inflation well above its 2-percent target. The speech of the Fed chairman indicates no intentions of pushing interest rates up to a level that will deliberately slow the economy.
The Australian Industry Group (AiG) revealed on Tuesday that the Australian performance of services index (PSI) edged up 0.3 points m-o-m to 52.5 points in September, indicating a faster rate of expansion compared to August. A reading above 50 indicates expansion, while a reading below 50 signals a contraction in activity. According to the report, all four of the five activity sub-indexes showed expansion in September, but two of them grew at a slower pace than in the previous month. Inventories eased in September, while deliveries accelerated. New orders continued to grow and at a slightly faster pace than August. Sales returned to almost the same modest growth result as the previous month while employment continued to be mostly stable across the services sector in September.
The Australian Bureau of Statistics (ABS) announced on Wednesday the total number of building permits issued in the country plunged by 9.4 percent m-o-m in seasonally adjusted terms in August, following a revised 4.6 percent m-o-m decrease in July (originally a 5.2 percent m-o-m drop). Economists had expected a gain of 1.0 percent m-o-m. According to the report, approvals for private sector dwellings excluding houses tumbled 17.2 percent m-o-m in August, while private sector houses approvals fell 1.9 percent m-o-m. In y-o-y terms, total approvals decreased by 13.6 percent.
III. Market Situation
The currency pair EUR/USD rose sharply, refreshing the previous day’s high, helped by the media reports the Italian government sought to reduce the budget deficit to 2 percent of GDP in 2021 due to the European Union (EU) pressure. The pair was also supported by the renewed weakening of the U.S. currency. Today, investors' attention will be focused on the statistics on employment in the U.S. private sector from ADP and a report on activity in the U.S. services sector from the ISM. It is expected that the number of employed persons rose by 185,000 in September after increasing by 163,000 in August, and the ISM non-manufacturing PMI fell to 52.9 points in September from 54.8 points in August. Apart from the data, market participants will also follow the speeches of the Fed representatives, looking for clues on the future pace of rate hikes. Resistance level - $1.1651 (high of September 28). Support level - $1.1505 (low of October 2).
The currency pair GBP/USD traded higher, as the U.S. currency demonstrated the broad weakness. In addition, investors adjusted their positions ahead of the release of the UK’s data on activity in the services sector. Economists expect the services purchasing manager index (PMI) probably dropped to 54.0 points in September from 54.3 points in August. Apart from the data, traders will also focus on the dynamics of the U.S. currency and the general market sentiment toward risky assets. Resistance level - $1.3115 (high of October 1). Support level - $1.2896 (low of September 10).
The currency pair AUD/USD fell sharply at the beginning of the session in response to the disappointing data on Australia’s building permits but then recouped almost all its early losses due to the broad weakening of the U.S. dollar and rising commodity prices. The Australian Bureau of Statistics (ABS) announced the total number of building permits issued in the country plunged by 9.4 percent m-o-m in seasonally adjusted terms in August, following a revised 4.6 percent m-o-m decrease in July (originally a 5.2 percent m-o-m drop). Economists had expected a gain of 1.0 percent m-o-m. Resistance level - AUD0.7240 (high of September 28). Support level - AUD0.7141 (low of September 17).
The currency pair USD/JPY traded slightly higher, due to a decrease in demand for safe assets. However, the U.S. dollar’s weakness limited the further growth of the pair. Investors also digested data from Japan, which indicated that the country’s services sector continued to expand in September, but at a slower pace. The Nikkei Japan Services PMI fell in September to 50.7, the lowest level in two years, from 51.5 in August. Economists had forecast the indicator to increase to 51.7. The survey also revealed that the Composite PMI, which covers both manufacturing and services, dropped to 50.7 in September from 52.0 in August. Resistance level - Y114.05 (high of October 1). Support level - Y113.31 (low of September 28).
U.S. stock indexes closed mixed on Tuesday. The Dow hit a new all-time high, helped by Intel’s (INTC; +3.6%) solid gain, while the S&P 500 and Nasdaq finished in the red, weighed down by a drop in Facebook (FB; -1.9%) shares and Italy's problems.
Asian stock indexes closed mostly lower on Wednesday, following a mixed performance on Wall Street overnight. Investors also weighed continuing concerns in Indonesia and India and growth in commodity prices. Markets in China were closed for a public holiday.
European stock indexes are expected to trade lower in the morning trading session.
Yields of US 10-year notes hold at 3.08% (+1 basis points)
Yields of German 10-year bonds hold at 0.43% (0 basis points)
Yields of UK 10-year gilts hold at 1.40% (0 basis points)
Light Sweet Crude Oil (WTI) futures traded higher. Crude oil for delivery in November settled at $75.33 (+0.13%). The crude oil prices rose moderately, reacting to the weakness in the U.S. dollar and the latest data from the American Petroleum Institute (API). The API reported that U.S. crude supplies rose by 907,000 barrels for the week ended September 28. Meanwhile, supplies of gasoline dropped by 1.7 million barrels and distillates reduced by 1.2 million barrels. Market participants are now awaiting weekly data on U.S. crude inventories from the U.S. Energy Information Administration (EIA), set to be released at 14:30 GMT.
Gold traded at $1,204.80 (+0.08%). Gold prices edged up, as the U.S. currency demonstrated negative dynamics. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, fell 0.25 percent to 95.26. Since gold prices are tied to the dollar, a weaker dollar makes the precious metal cheaper for holders of foreign currencies.
IV. The most important scheduled events (time GMT 0)
Purchasing Manager Index Services
FOMC Member Charles Evans Speaks
Fed Barkin Speech
ADP Employment Report
Crude Oil Inventories
FOMC Member Brainard Speaks
FOMC Member Mester Speaks
Fed Chair Powell Speaks
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