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I. Market focus
Despite the fact the weekend was full of news and events, some of which were very important, a relative calm prevailed in the foreign exchange markets at the beginning of a new week, and the main currency pairs held in narrow ranges by the beginning of the European session. In the morning, one of the main topics in the markets were reports that Italy’s government plan to improve the country's infrastructure and make it safe. It is reported that the plan is scheduled to be launched in September this year, and its volume will amount to EUR80 billion. Thus, the Italian government ignored the EU’s spending controls. The reason for this decision of the Italian government was the tragedy in Genoa, which occurred on August 14, when the collapse of a motorway bridge killed more than 40. The Italian authorities accused the European Commission in the tragedy, saying that the imposed by Brussels austerity policies led to the collapse of the bridge. The EU hit back, noting that Italy received enough money under European structural and investment funds for investment in network infrastructures such as roads or rail. The implementation of the announced plan, which includes the repair of roads, bridges, viaducts, and public buildings, such as schools, is expected to support the Italian economy as a whole due enormous investment. However, at the cost of this improvement will be an increase in public debt and deterioration of relations with the EU.
Monday’s session will not be busy with macroeconomic reports. The most important scheduled events will be the speeches of the representatives of central banks, including Deutsche Bundesbank president Jens Weidmann (at 10:00 GMT and 16:00 GMT), Bank of Canada (BoC) Senior Deputy Governor Carolyn Wilkins(at 13:15 GMT), Atlanta Federal Reserve Bank President Raphael Bostic (at 15:00 GMT) and the Reserve Bank of Australia (RBA) governor Governor Philip Lowe (at 22:00 GMT).
II. The market highlights are:
Statistics Canada reported on Friday that the country’s consumer price index (CPI) rose 0.5 m-o-m in July, following a 0.1 percent m-o-m increase in the prior month. On the y-o-y basis, Canada’s inflation rate surged 3 percent last month after a 2.5 percent gain in May. That was the largest y-o-y advance since September of 2011. Economists had predicted inflation would increase 0.1 percent m-o-m and 2.2 percent y-o-y in July. According to the report, prices went up in all eight major components in the 12 months to July. The transportation index (+8.1 percent y-o-y) was the biggest contributor to the y-o-y increase, boosted by rising prices for gasoline (+25.4 percent y-o-y) and fuel oil and other fuels (+28.1 percent y-o-y). Meanwhile, the closely watched the Bank of Canada's core index rose 1.6 percent y-o-y in July after increasing 1.3 percent y-o-y in the previous two months. That was the biggest y-o-y gain since February of 2017 and exceeded economists’ forecast of 1.3 percent y-o-y.
A report from the University of Michigan revealed on Friday the preliminary reading for the Reuters/Michigan index of consumer sentiment fell to 95.3 in early August. That was the lowest reading since September of 2017. Economists had expected the index would increase to 98 this month from June’s final reading of 97.9. According to the report, the index of current U.S. economic conditions fell to 107.8 in August from 114.4 in the previous month. Meanwhile, the index of consumer expectations stood unchanged at 87.3 this month. The report noted that the dominating weakness reflected much less favorable assessments of buying conditions, mainly due to less favorable perceptions of market prices.
The Conference Board announced on Friday its Leading Economic Index (LEI) for the U.S. rose 0.6 percent in July to 110.7 (2016 = 100), following a 0.5 percent increase in June. Economists had forecast an increase of 0.4 percent. Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board, said “The U.S. LEI increased in July, suggesting the U.S. economy will continue expanding at a solid pace for the remainder of this year. The strengths among the components of the leading index were very widespread, with unemployment claims, the financial components, and the ISM New Orders Index making the largest positive contributions.” The report also revealed the Conference Board Coincident Economic Index (CEI) for the U.S. went up 0.2 percent to 104.2 in July, while its Lagging Economic Index (LAG) for the U.S. declined 0.2 percent to 105.2.
The weekly report from Baker Hughes, which was released on Friday, showed that the number of active U.S. rigs drilling for oil remained unchanged at 869 during the week ended August 17. In the prior week, the oil-rig count climbed by 10. Meanwhile, the total active U.S. rig count, which includes oil and natural-gas rigs, also held steady at 1,057, as the gas rig count stood at 186 last week, and the miscellaneous rig count remained at 2. The U.S. rig count is up 111 rigs from this time last year when it was at 946.
III. Market Situation
The currency pair EUR/USD trade slightly lower, correcting after Friday’s rally, which was caused by a strong fall in the U.S. dollar index in response to a decrease in the U.S. Treasury yields and higher investors' appetites for risky assets. Today, market participants will continue to focus on the dynamics of the U.S. dollar index, as well as pay attention to the comments by the Deutsche Bundesbank president Jens Weidmann and Atlanta Federal Reserve Bank President Raphael Bostic. Later this week, investors will receive the data on the purchasing managers' indexes for the Eurozone from Markit. These indicators declined significantly this year, for both the services and manufacturing sectors, which also coincided with slower growth rates (the Eurozone’s GDP rose by only 1.4 percent in the first half of the year). August PMIs are expected to provide clues whether the economic growth in the Eurozone will restore in the second half of the year. Resistance level - $1.1628 (high of August 8). Support level - $1.1291 (low of June 28, 2017).
The currency pair GBP/USD consolidated near the opening level, due to the lack of new drivers. The pair received some support due to the improvement of investor appetite for risk assets. At the same time, the pound continued to be under pressure due to worries that Britain's economic performance could deteriorate after Brexit. With an empty economic calendar in the UK ahead, market participants will focus on the dynamics of the U.S. currency and the general market sentiment toward risky assets. Resistance level - $1.2827 (high of August 14). Support level - $1.2652 (low of June 22, 2017).
The currency pair AUD/USD fell slightly, due to partial profit-taking after a strong growth on Friday, which was underpinned by hopes the U.S. and China could resolve their trade dispute. The Wall Street Journal (WSJ) reported the Chinese and U.S. officials are mapping out talks to try to end their trade standoff ahead of planned meetings between President Trump and Chinese leader Xi Jinping at multilateral summits in November. Investors' focus is gradually shifting to the speech of the Reserve Bank of Australia (RBA) governor Governor Philip Lowe, set to start at 22:00 GMT. Last week, Mr. Lowe signaled that the next move in interest rates would more likely be an increase than a decrease. Resistance level - AUD0.7453 (high of August 9). Support level - AUD0.7202 (low of August 15).
The currency pair USD/JPY demonstrated a slight increase, supported by a rebound in the U.S. currency and a decline in demand for safe-haven assets. In addition, investors are preparing for the publication of the inflation report in Japan for July, which may show a faster inflation growth compared with June. Experts expect that the closely watched consumer price index (CPI), which excludes volatile fresh food prices, rose by 0.9 percent y-o-y after gaining 0.8 percent y-o-y in June. Even if the inflation in Japan accelerates in July, the Bank of Japan's (BoJ) monetary policy is likely to remain unchanged for some time. Resistance level - Y111.43 (high of August 15). Support level - Y110.10 (low of August 13).
U.S. stock indexes closed higher on Friday, supported by reports the U.S. and Chinese officials are planning talks to resolve their trade disagreement ahead of multilateral meetings in November. The focus also was on the Conference Board's Leading Economic Index (LEI) for July and the preliminary reading for the Reuters/Michigan index of consumer sentiment for August. The Conference Board announced its LEI for the U.S. rose 0.6 percent in July to 110.7 (2016 = 100), following a 0.5 percent increase in June. Economists had forecast an increase of 0.4 percent. Meanwhile, a report from the University of Michigan revealed the preliminary reading for the Reuters/Michigan index of consumer sentiment fell to 95.3 in early August. That was the lowest reading since September of 2017. Economists had expected the index would increase to 98 this month from June’s final reading of 97.9. The report noted that the dominating weakness reflected much less favorable assessments of buying conditions, mainly due to less favorable perceptions of market prices.
Asian stock indexes closed mostly higher on Monday on signs of progress in resolving the U.S.-China trade dispute.
European stock indexes are expected to trade lower in the morning trading session.
Yields of US 10-year notes hold at 2.86% (0 basis points)
Yields of German 10-year bonds hold at 0.31% (0 basis points)
Yields of UK 10-year gilts hold at 1.24% (0 basis points)
Light Sweet Crude Oil (WTI) futures traded lower. Crude oil for delivery in October settled at $65.06 (-0.23%). The crude oil prices fell slightly, due to the strengthening of the U.S. dollar and concerns over slowing global economic growth. Investors also continued to digest the latest data from Baker Hughes, which revealed that the number of active U.S. rigs drilling for oil remained unchanged at 869 during the week ended August 17. In the prior week, the oil-rig count climbed by 10. Meanwhile, the total active U.S. rig count, which includes oil and natural-gas rigs, also held steady at 1,057, as the gas rig count stood at 186 last week, and the miscellaneous rig count remained at 2. The U.S. rig count is up 111 rigs from this time last year when it was at 946.
Gold traded at $1,185.70 (+0.11%). Gold prices rose slightly, correcting after a significant fall in the previous week. However, the further growth in gold prices was limited by the positive dynamics of the U.S. currency. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, increased 0.18 percent to 96.28. 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)
Bundesbank Monthly Report
FOMC Member Bostic Speaks
German Buba President Weidmann Speaks
RBA's Governor Philip Lowe Speaks
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