The spotlight remains fixed on the Dollar this week with the US currency rallying across the board over the past 24 hours on the back of President Trump's threat to slap China with $200 billion of fresh tariffs. The focus today will still be on the greenback in light of the US inflation data and ahead of Monday's Retail Sales report. Equities had a miserable day yesterday around the globe but futures point towards a correction this morning with Europe and the US trending to the upside.
The greenback breaks higher against its peers on renewed demand in the face of a significant escalation in the trade spat between US and China. The proposed $200 billion tariffs' salvo is considerably larger compared to what we've seen up until now and should it be implemented it threatens to affect growth on a global scale. Investors rushed to cover their exposure by buying Dollars and the US currency's momentum will be put to the test today in light of the US Consumer Price Index report.
The US CPI reading will play a significant role in extending Dollar's rally or putting a stop to it as, depending on how the data prints, expectations for continued Fed tightening will either rise or decrease. The US central bank is expected to raise interest rates 2 more times this year and a strong inflation printing today will solidify the odds for this scenario and send the Dollar further to the upside. In the opposite case, the greenback will give up some ground as traders will look to bank profits from yesterdays' rally. For Dollar/Yen, the support is placed at the 111.30 level while the resistance higher sits at the 113.40 yearly highs.
The Euro came under pressure from the surging Dollar and dropped below 1.17 and depending on how the Dollar trades today we might see further downside for the shared currency. There's little in terms of fresh data on the docket from Europe today, the German inflation report just printed in line with expectations so price action today will hinge on Dollar's momentum. The intra-day support lies at the 1.1650 area and below that the next level to focus on is the 1.1600 mark.
The Pound is also in the red but it's remarkable to see that the 1.32 support provided the necessary cover to keep the UK currency afloat for the second time this week. There are 2 potential reasons behind this bullish support for Sterling at this time: either investors believe that the tilt towards a softer Brexit confirmed by the Chequers' meeting - even with the resignations it triggered - is a long-term positive step for Britain or they price in a BoE rate hike in August. In any case, the short-term price action will be dictated by Dollar's momentum and even though the bullish case for the Pound has its merits we could still see a retreat towards 1.3120 today depending on how the US CPI data prints.
Commodities slumped yesterday with Gold dropping close to $1,240 on Dollar's surge and Oil testing the $70 area. And although Dollar's momentum was behind Gold's retreat suggesting that there could be more losses towards the $1,238 lows, the case for Oil is strikingly different. The black gold declined as investors grow nervous on whether the trade dispute between US and China will eventually slow down global growth but the options market suggests differently. Options traders are increasingly bullish on Oil's prices pilling on their calls for prices to reach as high as $80 in September so a swift recovery towards the $73 area may be the next step here.
Finally, equities were in the red yesterday across the globe but this morning the Asian markets are trending higher in an attempt to recover their losses. This sudden tilt in sentiment suggests that traders are taking a more sober view this morning , try to look past the US tariffs and focus on the earnings season instead. The European and US futures are pointing slightly higher so we should be in for a positive session ahead.
MARKET EVENTS TO WATCH
- Euro-Zone Industrial Production - 1pm
- US Consumer Price Index - 4.30pm
All times are GMT +4.