Recently, market sentiment has taken a hit. Most forex majors were on a strong bullish trend until a few weeks ago, but now everything has turned upside down. The investor sentiment continues to deteriorate. Today it hit rock bottom. EUR/USD and GBP/USD have lost more than 100 pips from top to bottom.

The political situation in Italy is weighing heavily on the Euro and on the risk currencies. Safe haven currencies are making the most of it, but I don’t think the Bank of Japan and the Swiss officials are liking what they are seeing. The risk is that Italy might decide to abandon the Euro in favor of the Italian Lira. The Cinque Stelle leader Di Maio denied that this morning, but that’s the impression in the market now.

The European Session

• China Will Narrow Trade Gap with the US – Chinese officials agreed to import more US products today, specifically poultry and coal. That’s great for the US economy since Chinese energy imports from the US account for only 1% of total energy imports. On the other hand, that will likely damage the Australian economy, or the Indonesian economy, perhaps both of them.
• New Italian PM Candidate – Cottarelli is presenting his cabinet of ministers to the Italian president today. Chances are his cabinet will go through since Cottarelli is a technocrat and so is the president. However, the political scene doesn’t like that very much, so new elections are around the corner according to analysts.
• MIB Falls, Italian Yields Surge – The fallout in stocks continues and it is not just limited to the Italian index MIB 40. DAX, CAC, Nikkei, S&P etc have lost considerable ground in the last several days and the fall has accelerated today. Italian yields, on the other hand, have been surging. The 2-year bonds saw a 100 basis points increase today, from 0.90% yesterday to above 1.90% earlier today. 10-year yields are trading near 3% now, coming from below 1.90%.
• Moody’s might Downgrade Italy – Moody’s warned of downgrading its rating for Italy. This morning they said that it has nothing to do with politics, but with Italy’s high debt. If Italy is downgraded, that’s another reason for the yields to continue rising.
• No Rate Hikes from the ECB – Economists were predicting that the European Central Bank would raise interest rates 3-4 times in 2019. Today, those bets are for just one rate hike of a mere 10 basis points (bps) for next year. One more reason to be dovish on the Euro.
• Risk Currencies Are Getting Hammered, Safe Havens Are Getting Bid – All forex majors continue to get hammered today, apart from the three musketeers, the JPY, the CHF and the USD. Safe havens love times of panic.

The US Session

• US Consumer Confidence – Today we had a round of consumer confidence reports from Europe. They were a bit on the soft side but nothing to move the markets. The US consumer confidence is somewhat more important and might improve the sentiment a bit. It is expected to come at around 128 points. I expect the consumer sentiment to remain upbeat in the US after Donald Trump’s measures to revive the “sleeping bear” that is supposed to be the US economy. If the sentiment report is better than expected that might be another reason to buy the USD.
• Financial Stability Report from the RBNZ – The Royal Bank of New Zealand is publishing the financial stability report in the evening. I’m afraid it will be a bad report for the NZD. The sentiment is horrible in financial markets now and the New Zealand economy will likely get hurt from the new China-US relations.
• Forex Pairs Retracing Now – Forex majors have been really bearish all day, but it seems like a pullback is underway now. I don’t think that this pullback will last too long. If you are out of a trade, I suggest you follow the market in the coming hours and get ready to sell EUR/USD and USD/JPY.

Trades in Sight

Bearish GBP/USD

• The trend is extremely bearish
• The bearish trend has picked up the pace
• The pullback is complete on the 30-minute chart
• The 50 SMA is providing resistance

Stochastic is overbought, so the pullback is complete on this time frame chart

We sold GBP/USD a while ago as it was pulling back up. The price reversed down and we missed our take profit target by a mere pip. The retrace higher continued and stretched higher up. The price has now run into the 50 SMA on the 30-minute chart. The 50 SMA is also standing just above, so it seems as BP/USD will reverse lower again now.

In Conclusion

The US consumer confidence will be released soon. It may make things even better for the US Dollar. Although, I don’t expect this report to change the sentiment much in the markets, apart from the USD of course. The moves are still wild, so it will be another tough day at the office for forex traders today.