Drama in Europe Overshadows Euro, Gold in Focus

Political Drama Grips the Euro

The big news yesterday was Catalonia or, more accurately, Catalan President Charles Puigdemont’s response to Madrid’s independence deadline. Puigdemont’s inability to officially state whether his administration had declared independence from Spain saw the euro start the trading week under pressure, as the political drama prompted investors to shun the currency.

Spanish Prime Minister, Mariano Rajoy, is on record hinting that an official declaration of independence from Puigemont could prompt Madrid to invoke Article 155 for the first time since it was drawn up in 1978. Invoking 155 would effectively allow the Spanish government to legally take control of Catalonia. Should this occur, the euro would likely find itself under immediate selling pressure, as investors assess whether escalating political tensions in Europe could pose another threat to the unity of the trading block.

From a technical standpoint, the EURUSD remains on standby in a wide range ahead of Thursday’s deadline.

Technical traders will continue to observe how prices react around the 1.1850 level, and a breakout above 1.1850 may encourage a further incline towards 1.1920 and 1.2000 respectively. Alternatively, weakness below 1.1850 may trigger a selloff towards 1.1730 and 1.1680.

Will UK CPI data impact Sterling?

Fluctuating monetary policy speculations, rocky Brexit negotiations, and concerns over Theresa May’s longevity as Prime Minister have seen sterling embark on a rollercoaster over the last few weeks.

The currency sharply depreciated last week following European Chief Negotiator for Brexit, Michel Barnier’s comments. The French Republican said that talks around Britain’s exit from the European Union were at a deadlock, causing the GBP/USD to drop to 1.3120 last Thursday, down from a high of 1.3262 earlier that day. A report in Germany’s Handelsblatt newspaper the same day stating that the United Kingdom could be offered a two-year transitional Brexit deal provided a much-needed lifeline, and the beleaguered currency went on to recover gains, charting a rise of more than 150 pips against the Dollar on the day.

Attention now will be directed to today’s CPI report, which is set to hit a five year high, pressuring the Bank of England to raise interest rates. While there is an argument that higher rates will tame inflation, this could also impact business confidence and may have a negative impact on a fragile UK economy. Will the central bank raise rates in Q4 in an effort to tame inflation, or will it be forced to remain on standby amid Brexit uncertainty? This is the question every trader is asking.

Market players will continue to observe how the GBPUSD reacts around the 1.3300 region. Weakness below this level may open a path back towards 1.3150. Otherwise, a solid break above the 1.3300 resistance could inspire bulls to attack 1.3380.

Commodity Spotlight: Gold

With Catalonia and Brexit dominating the headlines, Gold looks set to become the unsung hero of the week. The yellow metal began the trading week shining, as prices crept towards the US$1305 mark. Political risks in Spain and escalating tensions between North Korea and Iran have contributed to keeping investor interest in the safe haven high. However, strong US dollar and investor’s profit-taking pulled the precious metal to trade at $1292 as of 8:00 GMT.

A weekly close above the $1300 psychological resistance level may encourage bulls to target $1320. However, as prices broke below $1300, then the next level of interest will be $1280.

This article is written by Lukman Otunuga, a senior analyst at FXTM