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Italian bailout still buoying stocks as May secures DUP pact

The upcoming trading session is set to be dominated by updates from the key global central banks.

The head of the European Central Bank, Mario Draghi, starts the ball rolling at 9am, before Bank of England governor Mark Carney discusses the UK financial stability report at 11am. Mr Carney is expected to express concerns about the level of credit usage. Federal Reserve chair, Janet Yellen, is scheduled to speak later, at 6pm (UK time). Traders were surprised by how hawkish Ms Yellen was at the last Fed meeting, so they are unlikely to be caught off guard again.

Eurozone's banking woes continue

The bailing out of Veneto Banca and Banca Popolare di Vicenza tells us two things: firstly, all is not well in the eurozone, and secondly, the powers that be will just keep racking up debt, making future generations pay for it. There have been concerns about the Italian banking sector for some time, and even though the bailout boosted investor confidence, that debt has now been added to Italy's national debt. The cost of the bailout to the Italian taxpayer could amount to €17 billion. The Italian government’s debt to gross domestic product is tipped to increase to 133% in 2017. The Italian banking system may live to see another day, but stagnant growth, stubbornly high unemployment and rising national debt will cause problems for the country down the line.

The eurozone has been plagued with crises and the standard reaction by the European Central Bank, and the respective national governments, is to keep the lights on at all costs. We have seen countries like Greece limp from crisis to crisis, and we can see that history keeps repeating itself. Equity markets in Europe, and in particular Italy and Spain, welcomed the recent bailout, but the fundamentals point to future problems.

UK political clarity

The pact between the Conservatives and the Democratic Unionist Party has given the UK some much needed political clarity. The Tories will be able to form a minority government with the supply and confidence of the DUP. Theresa May will still have a battle on her hands, but the prime minister is in a much better position now that the Northern Irish party will back her on certain big issues.

Oil is still suffering from the over-supply concerns and last week’s Baker Hughes rig count report has added to the problem. The number of active rigs in the US has increased for a 23rd consecutive week. The energy market was already feeling the pain from the high production rates from Nigeria and Libya – both countries are exempt from OPEC’s production cut. Demand for the commodity in the Far East is diminishing and that is putting pressure on the market.

Recently we have seen a sharp sell-off in oil and it pulled equity markets in Europe lower as investors are worried about disinflation. Taking the edge off of the cost of living may assist some central bankers in the short-run, but falling prices can damage growth prospects, and it can be a difficult downward spiral to snap out of.

Forex snapshot

EUR/USD – has been trading within the 1.1100 to 1.1300 range for nearly one month, and recently the bias has been to the upside. Rallies will encounter resistance at 1.1200, as there has been a considerable amount of consolidation in this area. A decisive break below 1.1100, would put 1.1000 on the radar. 

GBP/USD – is being supported by the 100-day moving average at 1.2637. If this level holds, the resistance at 1.2800 could come into play, and beyond that bulls will look to the 50-day moving average at 1.2858. Should it fall below the 100-day moving average at 1.2637, then the 200-day moving average at 1.2548 will be the next price to watch. 1.2370 would be the next support area below that.

EUR/GBP – has risen over the past two months, and 0.8845 is the initial resistance to watch out for, and if it is cleared, dealers will look to 0.8866. Pullbacks will find support at 0.8770 and the 0.8720 region.

USD/JPY – is being supported by the 100-day moving average at 111.80.  112.10 and 113.00 are the targets to the upside. A drop below the 100-day moving average at 111.80, and sellers will be looking to the 200-day moving average at 111.00, and the next support level below that is 110.30.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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