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Global uncertainty persists

Stock markets in Europe finished lower yesterday as traders remain fearful about the economic slowdown in China, and the political situation in Italy. 

The Peoples Bank of China lowered the reserve requirement ratio (RRR) for the fourth time in 2018, and traders took this as a sign that the Chinese authorities are worried about the cooling economy. The second-largest economy in the world has been slowing down for a number of years, and the trade standoff with the US isn’t helping. Beijing are showing no sign of giving in to the US, and the cutting of the RRR could be viewed as a way of positioning itself for the trade spat.

The trade tensions are taking their toll on the global economy according to the IMF, and the organisation lowered its global growth forecast for this year and next to 3.7%, down from 3.9%. The group cited the trade uncertainty regarding the US and China, North American trading relations, as well as the EU as the reason for the lowering of the outlook.

President Trump has been critical of the Federal Reserve for hiking rates, and in turn driving up the demand for the dollar. The greenback has been gaining ground against the renminbi, and it appears to be eyeing the August highs. The relative fall in the Chinese currency underlines how much the economy has cooled, and if it continues to fall it could exacerbate the trading imbalance between the two – which would infuriate Mr Trump.

The US celebrated Columbus Day yesterday and the government bond market was closed, but traders are mindful of the high yields that were reached on Friday. Stocks on Wall Street had a mixed finish last night. We are not expecting any major economic announcements from the US today so yields might be experience low volatility.   

The coalition parties in Rome are sticking to their guns and want raise the budget deficit in the hope of lifting economic sentiment. The country is already struggling to keep a lid on its debt position, and the thought of the country adding to its liabilities has scared investors. Matteo Salvini, the joint Deputy Prime Minister has called on the rating agencies to be fair in the assessment of the country’s financial health, and if you have to say it, you are probably not that confident of a positive outcome. Italian 10-year yields hit a four-and-a-half year high yesterday, as investors are cautious of the indebted nation. The old contagion fear is alive and well, and the country is weighing on the continent.

Oil had a volatile day yesterday after it was revealed that two major buyers of Iranian oil will continue their dealings with the regime in November – when the US sanctions are due to be enforced. The two Indian oil companies in question could face the wrath of Mr Trump. Export oil data for Iran showed that output is falling, and this supported the price.  Yesterday tropical storm Michael became a category 1 hurricane, and experts fear it could become a category 3 hurricane. Traders will be keeping eye on the situation.  

EUR/USD – has been diving lower since late September and if it holds below the 1.1510/00 region, it could pave the way for the 1.1300 area to be retested. A move to the upside could run into resistance at 1.1635 – the 100-day moving average.

GBP/USD – has broadly been pushing higher since mid-August and if the positive move continues it could target the 1.3300 region. A break below 1.3000 could put 1.2895 on the radar.

EUR/GBP – the key week and day reversal that we saw in late August could point to further losses and support might come into play at 0.8725. A bounce back could run into resistance at 0.8839 or 0.8900.

USD/JPY – the upward trend that began in March is still intact, and if the positive move continues it might target 114.73. Support might be found in the 112.15 region.

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