A sudden reversal for the Dollar catches investors off guard as risk sentiment dampens across the board. The US currency turned sharply lower yesterday on the back of renewed worries about the potential knock-on effect of the dispute between the US and China combined with bearish figures from the States. Today the focus will remain on the greenback ahead of the Durable Goods Orders data, while the UK retail sales report will also keep investors busy during the European hours. Safe havens gained with the Yen and Gold making headway, equities tumbled and Oil extended its losses.
The Dollar turned suddenly negative yesterday when China signaled that they're prepared for a long standoff with the US. Even though the US currency has been gaining on the back of the re-escalation between the two sides, the combination of these bearish headlines and a large miss in fresh US data turned the greenback on its head. The preliminary Manufacturing and Services PMIs out of the States printed considerably lower, extending their recent trend to the downside. It is clear that the domestic economy is slowing down as it is entering its late cycle stage but with most market participants focused on the equity markets' recovery the decline in the PMIs caught them off guard.
Dollar/Yen broke below 110 with the safe haven Japanese currency rallying when the US equity markets started feeling the pressure. Prices are now hovering around the 109.50 area but the decline may not be over yet as the US Durable Goods figures are pending for release. Economists are predicting a negative reading, which may be another indication that the US economy is headed towards slower growth, suggesting potential a deeper decline in the Dollar/Yen pair. A move below yesterday's lows exposes the 109 mark.
Meanwhile, the Euro takes advantage of the greenback's weakness and hits 1.12 this morning. Yesterday prices moved as low as the 1.11 mark but, following the decline in the Dollar, a short-squeeze rally kicked off. Is that a material change to the currency's outlook? We think not as the fundamental catalysts suggesting more weakness for the shared currency persist. Adding to that, yesterday's price action looks more like a profit-taking attempt from those being short on the Euro for some time now. Should this be true, then the sellers will re-emerge soon with the 1.1230 and 1.1250 levels appearing as potential selling areas.
Sterling was able to notch some gains over the past 24 hours, benefiting from the Dollar's decline. The UK currency managed to come off its 1.26 lows, even though there was nothing to support the move higher except the miss in the US figures. As such, we remain bearish on the currency's outlook and today's retail sales data may be another reason for the bears to rejoice. The report is expected to highlight yet another pocket of weakness in the UK economy, as the effects of Brexit are taking a toll on consumer demand. At the same time, the prospect of May resigning and the UK ending up with the likes of Boris Johnson or Jeremy Corbyn don't appear favorable so we should expect prices to retest the 1.26 lows soon.
Gold was among the instruments that enjoyed the most gains over the past 24 hours. Dollar's decline and investors' worries over a prolonged standoff between US and China benefited the yellow metal that rallied to $1,285. Given that the momentum remains strong and the Dollar may see another set of bearish domestic figures today, Gold could extend its rally all the way to the $1,295 area. Oil on the other hand tanked and our call for a potential decline towards $58, if the short-term support gave in, proved timely. Prices are currently trying to rebound but if this level also gets penetrated then more losses towards $55 could be next.
Stocks took the brunt of the hit yesterday with the European markets ending the day close to 2% lower while the US was around 1.2% in the red. Clearly China's intention to resist the US tariff pressures suggests that the trade war between the two sides will not be resolved soon and the concurrent domestic data weakness piles on investors' worries. This morning, futures are pointing towards a positive opening bell but should the Durable Goods report print in a bearish manner equities may turn negative again at the end of the week.
MARKET EVENTS TO WATCH
- UK Retail Sales - 12.30pm
- US Durable Goods Orders - 4.30pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research