Monday, May 20, 2019

Continued uncertainty and global growth concerns keep the greenback in demand

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

MORNING BRIEFING

The Dollar starts the week on a positive note continuing to rake in gains versus developed and emerging markets' currencies. Donald Trump's decision to re-escalate the trade dispute with China and domestic woes in Europe and the UK mean that investors seeking refuge are looking towards the greenback as the instrument of choice. The Euro and the Pound extend their declines while the Yen also lost ground as the global equity markets attempted to recover during the past few sessions. On the back of the Dollar's gains Gold moved further to the downside while Oil pushed higher following OPEC's commitment to keep production caps in place.

Despite repeated signs of late-cycle slowdown in the US domestic economy, with inflation stubbornly low and consumer demand waning, the Dollar remains well in demand. On Friday, the University of Michigan Sentiment report surprisingly beat expectations and, combined with the better than predicted housing data a day earlier, pushed the greenback further up. This week, investors' focus will be on the release of the FOMC minutes from their recent meeting where any hints on interest rates policy or the central bank's worries over the lack of inflation should be reflected on the greenback. In the meantime, with yields attempting to break above the 2.4% barrier, the Dollar should remain in demand: Dollar/Yen has moved above the 110 mark and a further extension to the upside points towards the 110.90 area.

The Euro and the Pound hit fresh lows last week but the decline doesn't seem to be over yet. Market participants quickly forgot the US' decision to delay any tariffs on auto imports from Europe and instead drove the currency below 1.12. Eurozone Consumer Confidence figures and the German IFO Survey will be released over the next couple of days and a bearish set of data will put the Single currency under more pressure. Prices are currently hovering around the 1.1150 level but with little to no good news coming in from Europe, the risk for the Euro lies to the downside with the 1.11 area coming into focus.

Meanwhile, Sterling also retreated and moved below the 1.28 level last week, which was considered an important technical support. Regardless of the oversold technical outlook of the currency, the way forward for the Pound continues to suggest more losses given the complete lack of progress in the Brexit talks and the weakness seen in the labor market last week. During the next few days, inflation comes to the forefront and if the data prints weak, then the 1.27 level will also be put to the test.

Gold continues to suffer despite the escalation of geopolitical risks as Dollar's strength is hard to overcome at this point. The yellow metal ended last week at the $1,275 area, after rejecting the attempt to break above $1,300, asking questions on whether the previous downtrend is back in effect. This remains to be seen and a potential test of the $1,267 support will be telling: if prices break below this key support then the bears will be in full control again, otherwise a bounce higher will retain hopes of Gold making another effort to the upside in due time. Oil was able to climb above the $63 mark and recent comments from OPEC that the production cuts will remain in place suggest that the next area to watch lies around the $65 level.

Finally, equities closed lower last week with the US and Europe around 0.4% in the red. Global growth remains a concern for equity traders, with the US continuously flashing slowdown signals and China also losing further momentum. The trade dispute among the world's two largest economies is another bearish catalyst and the timing of the Fed's decision to start cutting rates will be crucial. Currently, market participants are predicting that the US central bank will ease policy as soon as this fall or the end of the year at the latest. This is one of the reasons why equities are holding on their current levels and in the near term ongoing uncertainty will keep the global equity markets looking for direction.

MARKET EVENTS TO WATCH

  • Eurozone Current Account - 12pm
  • ECB Chief Economist Praet Speaks in London - 12pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research