The Dollar starts the week on a positive note posting gains across the board as Trump's tariffs on China take effect and investors turn risk averse. The Pound remains under pressure as Theresa May is given two weeks by her cabinet to find a solution following the Salzburg debacle. Equities kicked off trading with a bearish bias yesterday and futures in Europe and the US indicate a similar tone ahead of the London opening bell.
The greenback was initially weaker during yesterday's European hours but as soon as the US markets came online the Dollar reversed and rallied higher. Strong gains were seen against the European majors while the Japanese Yen was also under pressure from the surging US currency, eventually driving Dollar/Yen to 113 overnight. As we will explain below, the Euro may be able to remain afloat against the Dollar but the rest of the major currencies, namely the Pound, the Yen and the commodity dollars look likely to extend their losses ahead of the FOMC meeting on Wednesday.
After the Fed event takes place, Dollar's direction will depend on whether the central bank will deliver a bullish or bearish guidance. Strong labor market conditions and equity markets' performance suggest that the Fed has no reason to turn cautious but trade war-related uncertainty and pockets of domestic market weakness may force Powell to take his foot off the gas. All bets are off right now regarding Fed's bias but up until the meeting tomorrow the Dollar should remain well bid, particularly versus the commodity dollars.
The Euro spiked briefly to 1.18 after Mario Draghi highlighted what he sees as “a rigorous uptick in underlying inflation”, a comment he also made last week. The shared currency might have retreated later during the US hours after the Dollar picked up steam but it seems that its outlook points towards more gains soon. The IFO Survey surprised higher yesterday and given ECB's optimism and a series of stronger than expected data the Euro looks poised for a break above 1.18 as investors are speculating whether the ECB will actually consider raising rates earlier than expected. If the 1.18 level gives in, the Euro will have to face the key 1.1850 resistance but should it overcome that as well then the road is clear all the way to the 1.20 mark.
Gold is making an attempt to come off its lows following last Friday's decline and yesterday's session saw prices moving to $1,205 before settling around the $1,200 figure. The yellow metal will take its cue from Dollar's performance yet again and even though we expect sideways price action up until the Fed meeting, things may change after that depending on Powell's optimism - or lack thereof. Oil extends gains as OPEC defies Trump's negative comments regarding crude's prices; the bullish momentum seems to remain in place even though we begin to notice overbought conditions on our technical studies. As long as Oil remains above the $71.50 support, an extension towards $74 is still our base scenario.
Equities turned south at the start of the week with a sea of red seen across the globe. Now that Donald Trump's tariffs versus China have taken effect and China retaliated, the discussion has shifted towards more levies from the US which would be yet another escalation. Investors seem to realize that this continued spat will eventually take its toll on global growth hence the downbeat bias yesterday. This morning futures on either side of the pond point towards a negative opening bell; whether this will finally turn the tide and drive stocks considerably lower remains to be seen.
MARKET EVENTS TO WATCH
- US Consumer Confidence Index - 6pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research