Thursday, July 4, 2019

Consolidation is the name of the game as the US celebrates Independence Day

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

MORNING BRIEFING

Limited price action in the currency markets yesterday as most of the major pairs consolidated after the strong moves seen earlier in the week. The Dollar was largely unchanged on average with the Dollar Index oscillating around the 96.75 area for yet another day as Treasury yields held steady below the 2% mark. Gold was on the defensive with prices dropping $20 after Tuesday’s rally, equities were largely positive despite early bearish signs and Oil moved to $57.

With the US markets closed for the July 4th celebrations today and just one day ahead of the Non-Farm Payrolls report tomorrow, traders were rather hesitant to commit into any serious repositioning. Fresh data from the States came in weak again, with the ADP employment figures printing softer than expected while the non-manufacturing ISM reading was also on the bearish side. This host of reports again validates the slowdown in the US economy and explains why the Fed seems poised to start cutting interest rates as soon as possible.

Looking ahead, trading volume will be rather subdued today as the US markets will be closed and with little in terms of pending figures over the next 24 hours, attention will shift on the NFP reading due tomorrow. Unfortunately for the Dollar bulls, economists are expecting only a mild pickup in job growth with around 163k jobs expected to be added in the domestic market. However, given the many signs of weakness seen in several parts of the economy, the odds for a disappointing reading are substantial and should this be the case, the Dollar will likely suffer further. Dollar/Yen is already below 108 and despite yesterday’s consolidation, another bearish piece of US data may push prices towards the 107.50 and 107 levels in the near term.

Meanwhile, the Euro has been trading sideways over the past couple of days as the weakness seen in the Dollar is offset by the bearish bias coming from the ECB and investors’ expectations for fresh easing in the near future. The recent leak from the European Central Bank that they may not introduce additional easing measures during their July meeting was not enough to lift the currency, that remains below the 1.13 area. Keep in mind here that as we mentioned yesterday, Lagarde’s nomination as Draghi’s replacement is hinting on a continued monetary loosening of ECB policy as a means to reinvigorate growth in the region, further underpinning the dovish sentiment. Having said that, it will be interesting to see what kind of a reaction we’ll get from the shared currency in case of a miss in the NFPs tomorrow; despite the bearish bias in place, it’s likely that a move above 1.13 could be in the cards at least for a short period of time.

Gold was among the most active instruments yesterday and saw a day of weakness as prices retreated from their $1,440 levels. There was really no catalyst to turn the tables or any improvement in risk sentiment that justifies why prices dropped $20 so we have to put this down to some profit-taking action taking place. Despite that, Gold is a very interesting instrument to keep an eye on given that prices have now attempted to break into the $1,450 area twice and failed, forming a double top pattern. From here, Gold will either manage to overcome this key level and travel towards the $1,465 mark - potentially on the back of another weak US report like the NFPs - or abandon this effort for now and mean-revert towards the $1,400 area.

Over to the equities’ universe, the earlier signs for a bearish session yesterday morning were proven false and stock markets around the world pushed higher by the end of the day. Europe closed around 1% in the green while the US indices advanced approximately three quarters of a percent. However, with the bond markets pointing further and further towards weaker growth ahead, the only reason why equities are pushing higher has to be investors’ expectations over the Fed’s rate cutting plans. Whether this will be enough to fuel a sustained move into higher ground remains to be seen - we actually doubt that it will - so caution is advised.

MARKET EVENTS TO WATCH

  • Eurozone Retail Sales - 1pm
  • US closed for Independence Day

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research