Tensions between Italy and the EU ticked up yesterday, and in turn so did Italian government bond yields. 

Brussels have been critical of the Italian government’s unwillingness to curb it debt levels, and it might lead to the administration in Rome being fined €3 billion. The news sparked fears in the Italian debt market, and seeing as Italian banks are greatly exposed to the domestic debt market, they came under pressure too.

Matteo Salvino, is Italy’s joint deputy prime minister, and he is committed to opposing the EU’s fiscal rules, and he wants to run a budget deficit, and rack up debt, in a bid to try and spur on economic growth. The Italian economy has recently emerged from recession, and Mr Salvini wants to keep the economy motoring along. Mr Salvini is also the leader of the Lega Party, which took the lion’s share of the vote in the European elections over the weekend, and that is likely to harden his stance against Brussels. The Lega party are critical of the EU, and they don’t want to see Italy go the same way as Greece where is becomes a debt servicing machine.

The trade standoff between the US and China continues, and that played a minor in yesterday’s declines too. President Trump claimed the US is not ready to make a deal with China, and he feels the Beijing delegation should have accepted the deal that was on offer, rather than row back on earlier promises, and try and renegotiate the terms. Mr Trump reminded China that tariffs could go up ‘substantially’.  

US stocks dropped last night as traders took their cues from the bond market. The yield on the US 10-year government bond dropped to a level last seen in September 2017, and this is a clear indication that bond dealers are in risk-off mode.

Equity markets in Asia lost ground as the negative sentiment on Wall Street spilled over into the Far East.

The Huawei legal saga continues as the company is filing a ‘motion for summary judgement’, and the Chinese tech giant is hoping the US court will find in their favour without having a trail.

The US dollar had a positive run yesterday, and that was helped along by solid economic announcements. On a monthly basis, house prices grew by 0.7% in March, according to the Case Schiller report, and it topped the 0.5% forecast. The Conference Board consumer climate reading came in at 134.1, and that was big improvement on the April reading of 129.2. The greenback didn’t have much competition yesterday as there were no major economic updates from Europe, and it appears the greenback’s wider upward trend is still intact.

Gold and silver suffered as a result of the firmer US dollar, as the inverse relationship between the metals and the US dollar weighed on sentiment. Gold incurred modest losses, while silver was harder hit, and it dropped to a fresh five month low.

French CPI will be announced at 7.45am (UK time), and economists are expecting a reading of 1.2%, which would be a drop off from the 1.5% registered at April. The quarterly GDP update will be announced at the same time, and the consensus estimate is 0.3%.

German unemployment will be posted at 8.55am (UK time) and the rate is tipped to hold steady at 4.9%.

The Bank of Canada (BoC) will announce its interest rate decision at 3pm (UK time), and traders are expecting the bank to keep rates on hold at 1.75%. In March, the BoC cautioned that the global economy is cooling, and the bank conceded that growth in the first-half of 2019 will probably be slower than what was projected in January.  Recently we have seen respectable retail sales figures and jobs data from Canada, and that might prompt the central bank to use more neutral language.

EUR/USD – has been broadly pushing lower since early January, and if the negative move continues it might target the 1.1000 area. Resistance might be found at 1.1322.  

GBP/USD – has been driving lower since mid-March, and if the bearish move continues it might encounter support at the 1.2600 region. The 200-day moving average at 1.2956, might act as resistance.

EUR/GBP – has rebounded for over two weeks, and if it holds above 0.8800, it might bring 0.8939 into play. A move to the downside might bring the 50-day moving average at 0.8645 into play. 

USD/JPY – while it holds below the 100-day moving average at 110.55, its outlook should remain bearish, and support might be found at 108.50. A rally might target the 112.00 region.

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