European markets enjoyed a bit of a rebound yesterday after Italian politicians modified some of their language, offering to lower the deficit from 2020 onwards. The more conciliatory tone took some of the sting out of concerns that the European Commission and the Italian government were heading for an almighty clash later this month.

That may still happen, of course but for now Italian yields have slipped back from 5-year highs, and equity markets have rebounded. There is still a long way to go as the budget still needs to get through the Italian parliament before it is submitted to the EU, but investors appear to have been reassured by finance minister Giovanni Tria’s pledge to target deficit reduction after 2019, even though Luigi di Maio stated that they would simply mull the idea.

At the risk of being cynical, saying you’ll mull something over is also an elegant way of saying I’ll think about it, knowing full well that you’ve no intention of doing so.

On the flip side there is a big difference in getting the European Commission to overlook a budget deficit of 2.4% for 2019, when only two years ago France was running a deficit almost double that in excess of 4%, when Pierre Moscovici was French finance minister. He, of all people will know of the need to be able to compromise, particularly when you are dealing with the third largest economy in Europe.

The pound had a decent day yesterday no doubt helped by the fact that Prime Minister May managed to navigate the final day of the Conservative Party conference, without coughing, interruption and the scenery collapsing around her. There was a sense of palpable relief that while nothing much of any note was added to what we already know about the next steps in the Brexit negotiation, there was at least some semblance of order on the final day.

A decent set of UK PMI numbers may well have also had a part to play in the slightly firmer tone as the latest September data pointed to an economy that could well have seen an expansion of between 0.3% and 0.5% in Q3, after services PMI came in at 53.9 for September.

The US economy meanwhile continues to race ahead after the latest ISM non-manufacturing survey posted its best performance since 1997, at 61.6, with all the internals pointing to continued expansion. Prices paid was slightly higher, while the employment component also jumped sharply to 62.4 from 56.7, pointing to an acceleration in economic activity. This in turn put a rocket under treasury yields with the 10 year yield taking out the highs this year at 3.11%, putting in a 7 year high above 3.15%, while the 2 year yield hit a new 10 year high above 2.85%.

The US dollar index also took out its September peaks, and it this rise along with rising rates that is likely to increase the pressure on emerging market currencies in the coming days, particularly since oil prices show little signs of slowing their recent moves higher.

US equity markets also shot higher with yet another new record for the Dow, before falling back and closing well away from their intraday highs.

Earlier in the day Charles Evans of the Chicago Federal Reserve indicated that he was comfortable with how the US economy had been performing and based on the available data was also comfortable with the idea of a December rate rise.

While he isn’t a voting FOMC member this year, he is next year and in this context this is an important intervention because it suggests he doesn’t have any concerns about the type of economy he will be inheriting.

The latest ADP payrolls report was similarly robust, coming in well above expectations at 230k, and laying a decent foundation for tomorrow’s US payrolls report. The size of job gains seen in both the ADP and ISM reports would appear to suggest that the US still has some way to go until we see full employment, and as such we could well see the unemployment rate fall further in the coming months.

EURUSD – the move below the 1.1500 level now opens up a move back towards the August lows at 1.1300. The 1.1590 level now becomes resistance, along with the 1.1690 level as we look to head lower.

GBPUSD – has slipped below the trend line support from the August lows at 1.2660, and closing in on for a potential move towards the 1.2850 area. We need to see a move back through the highs this week at 1.3120 to open up a move back to 1.3220.

EURGBP – currently ranging between support at the 0.8850/60 area and resistance at the 0.8940 area. A move below the September lows at 0.8845 could well see further losses. Resistance comes in at the 0.8940 area with the bigger level remaining back at 0.9040.

USDJPY – continues to close in on the November 2017 peaks at 114.73. A move through 115.00 opens up a move to the 115.60 area. Support comes in at this week’s low at 113.60.

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.