Investors exhale as Catalan fears ease

A strong sense of relief was felt across financial markets on Tuesday evening, after Catalan leaders signed a “symbolic” declaration of independence, but immediately suspended its formal approval and called for talks with Madrid.

Although President Carles Puigdemont’s remarks disappointed many of his ardent supporters, who were hoping for a unilateral declaration of independence, his speech was music to investors’ ears, as this softer approach eased tensions.  However, there is still a possibility that Puigdemont’s call for dialogue with Spain could rekindle investor anxiety, especially when considering how the Spanish government has made it clear on many occasions that it will not enter into talks with Catalonia’s government. With Brussels backing Spain and insisting that the referendum was illegal, things could end badly for Puigdemont, if Madrid turns up the heat. The Spanish government will be holding an emergency cabinet meeting today, to discuss its official response to Puigdemont’s declaration and as such, could spark euro volatility.

From a technical standpoint, the EUR/USD rallied to a fresh weekly high above 1.1820 on Tuesday evening, after Catalonia stopped short of declaring independence. Prices still remain in a very wide range, with 1.1850 acting as a pivotal point on the daily charts. Price action suggests that the pair is waiting for a catalyst to venture higher or lower, and this could come in the form of the Spanish government’s response to Catalonia’s “symbolic” declaration. A breakout above 1.1850 may forge a path back towards 1.2000. In an alternative scenario, if 1.1850 acts as a tough resistance, then sellers may target 1.1680.

FOMC meeting minutes in focus

The dollar depreciated against its peers on Tuesday, amid speculation that Donald Trump’s tax overhaul plan could face headwinds down the road. This has been a rough week for the greenback, as North Korean tensions and an absence of inspiration for dollar bullish investors exposed the currency to downside losses.

Wednesday’s main risk event and potential market shaker will be the release of September’s FOMC meeting minutes, which investors will closely comb through for clues on rate hike timings in the final quarter of 2017. With the Federal Reserve speakers repeatedly dishing out hawkish signals, the pending Fed minutes could be presented with a similar hawkish touch, potentially inspiring dollar bulls. Markets also will pay close attention to discussions around inflation, and if voting members have looked beyond the recent weakness, to the continued gradual removal of monetary policy accommodation.

From a technical standpoint, the Dollar Index has found itself under pressure on the daily charts. A breakdown below 93.00 could hand over victory to sellers, with the next level of interest at 92.50. In an alternative scenario, bulls need to break back above 93.75 to jump back into the game.

Commodity spotlight – Gold

Gold quietly appreciated to its highest level in nearly two weeks on Tuesday, as a vulnerable dollar, political risk in Spain and North Korean tensions, boosted investor attraction towards the metal.

While uncertainty and geopolitical risk are likely to stimulate appetite for gold in the short term, gains remain capped by rising expectations of another U.S. interest rate increase in December. Much attention will be directed towards September’s FOMC minutes released later today, which will have the ability to punish gold, if hawks are in the vicinity.

Taking a look at the technical picture, although the yellow metal is in the process of a technical bounce, sellers are still in firm control below the psychological $1300 level. A breakdown back below $1280, is likely to create a path back towards $1267. In an alternative scenario, a daily close above $1290 should encourage an appreciation to $1300.