Monday, June 24, 2019

Can the Euro sustain its gains against a dovish ECB backdrop?

Tags
  • Dollar
  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks
  • Oil

MORNING BRIEFING

The Euro ended last week on positive footing benefiting from the weakness seen in the US Dollar on the back of the FOMC meeting. The shared currency has now run an impressive rally of around 200 pips over the past few sessions and traders begin to wonder whether more gains can be seen or some profit-taking is indeed advised. Meanwhile, Sterling also took advantage of the bearish sentiment for the greenback and climbed above the 1.27 mark with similar worries over its medium-term outlook. Gold looks to establish a base of support above the $1,400 mark, equities were rather bearish on Friday and Oil advanced to $58.

We’re going to start our overview with the Euro this morning as the Single currency will remain front and center today ahead of the German IFO report. The business sentiment figures are always a good bellwether for the overall state of the European economy, given that Germany is considered the powerhouse of the region. Despite the bullish trend in the European currency though, economists are predicting that today’s IFO data will come in a bit softer, casting doubts over the sustainability of Euro’s recent gains.

Truth be told, Germany has seen a number of weaker reports over the past weeks, highlighting the slowdown in domestic growth in line with what’s happening in Europe in general. As such, if today’s data indicate continued weakness in business sentiment, this will not bode well for the shared currency. Prices are currently trading just shy of the 1.14 mark and after an impressive rally since the start of the month some profit-taking could be seen, which would also alleviate the overbought conditions in the Euro. The support lies around the 1.1340 area and a pullback towards that level looks likely, even though it wouldn’t change the current bullish bias.

Meanwhile, most of the gains for the Euro and the rest of the major currencies have to be attributed to the decline seen in the Dollar. The US currency has weakened significantly since the Fed opened the door for a rate cut next month and potentially more moves by the end of the year. The dovish tilt in the US central bank’s outlook was expected but what sent the Dollar tumbling was the fact that most of the US policymakers indicated that one rate decrease would probably not be enough, suggesting the need for continued easing as the economy slows down.

Having said that though, we feel it’s crucial to reiterate what we mentioned last week: despite the expected weakness from the Dollar’s side given the dovish outlook provided from the Fed, investors should be really selective when it comes to finding the best option to take advantage of this. The likes of the Euro, Sterling and the commodity currencies may not be the best choices, given the dovish ECB outlook, the unresolved Brexit and the high correlation of the antipodeans with the Chinese economy’s growth rate, which is also slowing down. Safe havens may be the best way forward with the Swiss Franc and Japanese Yen appearing as more appropriate options.

Elsewhere, Gold ended last week just below the $1,400 mark but is already trending to the upside again. Last week we made a call to suggest that the yellow metal had peaked as we felt that the expected dovish change in the Fed’s outlook was pretty much priced in. Albeit, we were caught off guard along with many others when the FOMC dot plot indicated that 2 rate cuts by the end of the year would be more appropriate, sending the Dollar significantly lower. As such, we now believe that Gold may have more room to run as investors would be adjusting their portfolios ahead of more weakness from the US currency and in light of a decelerating growth rate in the US and the global economy. As long as prices remain above $1,375, the odds are in favor of more gains towards the $1,450 area.

Finally, equities traded mostly lower on Friday with market participants growing worried as the US indices were approaching their all-time highs. With the Fed signaling rate cuts ahead, equities would normally gain but we think that investors join us in assessing that for the US central bank to turn dovish in a hurry, the domestic economy must be really slowing down. In any case, futures on either side of the pond are indicating a marginally bullish opening bell this morning and it would be interesting to see whether the bulls will be able to “convert” those growing nervous or vice versa.

MARKET EVENTS TO WATCH

  • German IFO Expectations - 12pm
  • German IFO Current Assessment - 12pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research