Wednesday, February 6, 2019

Currencies are testing key technical levels as President Trump's SOTU address proves a non-event

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

MORNING BRIEFING

Markets participants are having a rather muted reaction to President Trump's State of the Union overnight address this morning. The US President stuck to his usual lines, pledging to build his wall with Mexico and accused the Democrats that they attempting to divide the country with “partisan investigations”. The Dollar has seen little action on the back of the speech while Treasury yields continue to trade sideways after yesterday's decline. Equity futures are trading flat, Gold consolidates around $1,313 and Oil retreats to $53.50.

Currencies are seeing further declines versus the Dollar on the back of the strong NFPs last week and the lower printing of the ISM figures yesterday doesn't seem to affect the greenback's bias. The rest of the week is barren of any important US-related reports which suggests that the trend in place will persist. Given that most currency pairs are testing key levels, it will be important to see whether the fresh demand for Dollars will drive prices beyond these barriers, thus altering their medium-term outlook.

The Euro is pushing lower having reached the 1.14 mark this morning and yesterday's Eurozone retail sales report didn't help. The data confirmed the slowdown seen in the Euro area, printing at -1.6% for the month of December, falling in line with ECB's remarks for lower growth on the back of tighter trade conditions. A break below 1.14 for the Euro will signal further weakness ahead and it will bring the 1.13 area into focus. On the flip side, if the shared currency manages to hold above this support then a push towards 1.1440 can be expected.

Sterling dropped further yesterday and broke below the 1.30 figure as traders begin pricing in the prospect of a no-deal Brexit again. After the rejection of Theresa May's “plan B” we've seen little progress in reaching an agreeable solution and no request for an extension to Article 50. All this lack of progress is making traders nervous and the Pound is suffering as a result. Tomorrow's Bank of England rate decision will provide little comfort to Sterling traders and the currency is already testing the key 1.2930 support. Should this level give way then prices could collapse to 1.2850 as the absence of technical support combined with no good news coming from the Brexit front will leave no other option for Pound traders.

Gold still consolidates just above the $1,310 level as Dollar's strength combined with the ongoing trade tensions between US and China keep the yellow metal in limbo. From a technical perspective, the prospect of another leg higher still exists but for this to happen a risk-off catalyst is needed, so for the time being we remain cautious and prefer to wait for this consolidation phase to end before assessing its short-term outlook. Oil failed to break above $55 and is again retreating towards $53.50; a penetration to the downside will expose the $51 area, otherwise a consolidation between the above two levels will be the way forward in the immediate future.

Equities had a very strong day yesterday with the European markets around 1.5% higher while their US counterparties closed around 0.5% in the green. Global stocks have run an impressive rally during the first month of the year but questions now emerge on whether some profit-taking will kick in and drive prices to the downside. Risk-off catalysts remain in the background, with the US and China no closer to a trade agreement and President Trump likely to shut down the government again, so we advise caution at this stage.

MARKET EVENTS TO WATCH

  • German Factory Orders - 11am
  • US Trade Balance – 5.30pm
  • U.S. Crude Oil Inventories - 7.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research