Friday, January 11, 2019

Central banks call for “patience”, Dollar suffers but equities gain

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

MORNING BRIEFING

Central banks' forward guidance is the dominant theme in the global money markets at the end of the week after both the Fed and the ECB have now released the minutes of their recent meetings. The Dollar saw a minor boost yesterday supported by higher Treasury yields but the broader weakness seen recently remains in place. Equities closed higher in Europe and the US, Gold consolidates between $1,285 and $1,295 but Oil marches higher.

After the FOMC minutes revealed the Fed's now cautious and patient approach on raising interest rates further it was ECB's turn to strike a similar tone. The central bank had lowered their forecasts for the year ahead, amid broader economic weakness domestically and abroad, but Governing Council member Villeroy went a step further: he suggested that the ECB should be patient and delay making any decisions on rates' policy until the spring. This would suggest that the actual date of the first interest rate hike could come later than expected ie. towards the end of the year.

These comments took a toll on the Euro yesterday forcing it lower to test the 1.15 support area. The shared currency managed to remain above this key level for now but it will be interesting to see how the week ends. As we highlighted in our analysis yesterday, if the Euro manages to hold on its recent gains and stays above 1.15 amid a more subtle ECB guidance then the next stop for the currency should be the 1.16 area. On the opposite case a retest of the 1.1450 lows would be the next.

The commodity dollars are pushing higher this morning with the Australian and New Zealand currencies extending their recent gains versus the greenback. Given the rather dull conclusion of the US-China trade talks that doesn't really alter the outlook of global trade relations, it must be Dollar's weakness that fuels the gains for these currency pairs. For the Aussie a further extension of the rally points towards the 0.7350 level as the major target while the Kiwi could hit 0.69 as long as these parameters persist.

Little has changed for Gold over the past 24 hours, the price action is still constrained between $1,280 and $1,295 as the contradicting dynamics of reduced risk aversion and Dollar weakness persist. We expect this price range to remain in place until the end of the week. Oil on the other hand hits new highs and heads for a significant weekly gain, prices have almost reached the $53 area which brings our target of $54 in focus sooner than expected.

Equities ended the day higher yesterday with small gains for Europe and the US, while Asia is also trading with a bullish bias this morning. The coordinated call for “patience” coming from the major central banks leaves room for equity traders to grow optimistic in the short term, hence the positive beat. Futures in Europe point towards a positive start of the day, while the US markets are expected to open flat, suggesting an upbeat end to a week that was rather pleasant for equity bulls.

MARKET EVENTS TO WATCH

  • UK Industrial/Manufacturing Production – 1.30pm
  • US Consumer Price Index - 5.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research