Tuesday, December 18, 2018

Dollar and equities in the red ahead of the Fed's meeting tomorrow

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

MORNING BRIEFING

The Dollar drops alongside equities in Europe and the US during the first session of the week. Investors seem to be very concerned about the Fed meeting scheduled for tomorrow and prefer to go on the defensive ahead of a potential bearish shift. Yen gains considerably driving prices below 113 against the greenback, while Gold moves towards the $1,250 level on Dollar's weakness. Oil pushes lower again hitting $49 this morning.

We made it clear in our daily report yesterday that the Fed meeting on interest rate policy will be the key event of the week. And indeed investors are already focusing on what the Fed will say regarding the path of their future rate hikes with the Dollar coming under significant selling pressure. The current narrative from the Fed implies 3 more rate hikes next year but market participants are only pricing in 1 during 2019, according to Fed fund futures. As such, there's significant divergence between what we know from the Fed and what the markets think, which always creates a repricing risk for currencies.

This will all be made clear when the US central bank release their dot plot, which aggregates the FOMC members' expectations on the number of interest rates increases needed. If the consensus moves to 2 (or even fewer) rate moves next year, the Dollar will suffer. Dollar/Yen looks particularly weak below 112.30 and a penetration of this support area will clear the path towards the 111.60 and 110.70 marks, especially if the US equity markets continue to push lower. The Euro also looks poised for a move higher if the Dollar retreats further following Fed's meeting, the short-term target to the upside sits around the 1.1440 level. However, as we mentioned in recent reports the Euro might not be able to sustain any gains for a long time as Europe's domestic troubles keep investors skeptical.

Gold rallied yesterday to extend its rally to $15 over the past 2 trading sessions. Prices have come off the $1,235 low as market participants began pricing in the possibility of a more dovish Fed forward guidance and are now testing the $1,250 highs. Technically the momentum behind the yellow metal's rise has slowed down creating a divergence between price action and momentum but if the Fed sends a bearish message fundamentals will trump technicals and Gold may rally all the way to the $1,260 area. Oil on the other hand broke lower yesterday, going through the $50 mark to trade as low as $49; as said in our earlier reports, traders are willing to sit on the sidelines until the end of the year until the OPEC production cuts come in effect.

Equities were in the red yesterday even though the start of the day looked promising. Europe was down around 1% on average while the US markets declined by around 2%. As we mentioned yesterday, a potential global slowdown poses a huge threat to equities and investors are worried that the Fed will send a bearish message that will eventually drive capital away from stocks and into bonds. The risk off bias permeated the Asian markets and this morning the futures on either side of the Atlantic are pointing lower with investors rushing to go on the defensive.

MARKET EVENTS TO WATCH

  • German IFO Current Assessment – 1pm
  • US Housing Starts – 5.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research