Monday, September 10, 2018

Dollar rallies post-NFPs but can these gains last against all the other majors?

Tags
  • China
  • Dollar
  • Euro
  • Gold
  • Pound
  • Stocks

MORNING BRIEFING

The Dollar soars after the impressive Non-Farm Payrolls report on Friday that beat expectations underpinning the continued labor market strength seen in the US. The Euro and the Pound came under pressure from Dollar's rise ahead of a week of central bank meetings for both European majors. Equities ended Friday mixed encouraged by the strong NFPs but also worried about Donald Trump's intended tariffs against China, futures are currently pointing slightly higher.

The release of the Non-Farm Payrolls report was the most expected event of last week and it certainly didn't disappoint. An increase of 201k jobs and a very robust 0.4% rise in wage growth sent the Dollar higher but the question now becomes whether the US currency can steam ahead from here. There's a combination of factors we need to assess to answer that: the strong NFPs confirmed Fed's intention to raise rates this month but we feel that this was pretty much priced in so we shouldn't expect a long-lasting Dollar push on the back of this. On the other hand though, President Trump's threats to impose fresh tariffs on China would be a positive driver for the US currency and one that could propel it to new highs. As such, we believe that the balance of catalysts points towards more gains for the Dollar, especially versus the Euro and the Pound, but Dollar/Yen might be a different story.

Trump's decision to escalate the tariff threats against China and to include Japan as one of his potential targets creates a sense of uncertainty that doesn't help the Dollar versus the Yen. The Japanese currency is a prime destination for risk aversion flows and investors will likely look to find cover in the Yen if Trump goes ahead with his plan. As such, the path of least resistance may point lower for Dollar/Yen and a move towards the 110.40 lows looks likely and a break below that would clear the path towards 110.

The Euro and the Pound will be front and center for yet another week ahead of the ECB and BoE central bank meetings. Unfortunately for the majors' bulls, these meetings should provide little fresh stimulus for either currencies: Mario Draghi will not deviate from his cautious tone after Eurozone's data printed mixed last month and the BoE can do little to help the Pound after they raised rates last month amid a still uncertain Brexit outlook. For the Euro, a move below 1.1550 would expose the 1.1450 and 1.14 levels while the Pound will take its cue from Brexit-related headlines; positive news will drive prices to 1.30 again while further uncertainty will open the door towards the 1.28 mark.

Commodities are on diverging trajectories this morning with Gold proceeding lower after Dollar's surge and Oil recovering after a $4 drop last week. For Gold, Dollar's price action is the main catalyst and as fresh data comes in supportive of the greenback's momentum we may see further losses towards the $1,190 area. Oil on the other hand was able to recover slightly; news that there might be a reduction of the available supply sent prices to $68 and a continuation of this recovery may see Oil hitting $69 and $69.50 soon.

Equities ended the week in a mixed manner as the positive effect of the strong NFP data was offset by worries that Trump's intended tariffs on China - and possibly Japan - would hurt global growth. Nevertheless, European and US futures are pointing higher this morning but it's not clear whether this positive bias will hold up. Should Trump pull the trigger on fresh levies then investors will again look for cover and all the global indices will turn red.

MARKET EVENTS TO WATCH

  • UK Industrial Production - 12.30pm
  • UK Manufacturing Production - 12.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Market Research

 
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