An improvement in risk sentiment fueled by encouraging news from European politics helped the Euro and the Pound come off their lows yesterday but can it last? At the same time, the Dollar strengthens versus the rest of the majors with gains against the Japanese Yen, the commodity dollars and Gold as fresh US data underpins the greenback's rally. Today, market participants' focus will remain fixed on Europe with incoming PMIs from the area pending for release while Friday's NFP report should increase demand for the Dollar in expectation for a positive reading.
The Pound is still at the top of our watch-list this morning with the UK currency dropping all the way to 1.28 during the earlier hours of the day yesterday. However, news that BoE Governor Carney would be happy to extend his tenure past 2019 and rumors that EU officials are exploring ways to resolve the Irish border obstacle in the Brexit talks helped the Pound recover. The important question though is whether Sterling will be able to sustain these gains. Unfortunately for the UK currency, the fresh PMI data for August doesn't help with manufacturing and construction figures declining earlier in the week. If today's Services data prints lower as well - as expected - then the Pound will find it hard to extend its gains and with the Dollar in the ascendancy ahead of the NFPs it looks more likely that Cable will revisit its 1.28 lows and possibly break below them.
The Euro was on a similar mood yesterday briefly dropping below 1.1550 before making a U-turn to rally to 1.16 again. News that the Italian coalition government has agreed to respect the EU budget deficit rules took away some of the risk-off sentiment surrounding the Euro but again the question becomes whether the shared currency can hold on its gains. With the spotlight falling on the Eurozone, German and French Services PMIs today the path of least resistance seems to point lower for the Euro. French and German retail sales weakened earlier in the summer and this should take its toll on today's data. If this is the case, the Euro will trend towards yesterday's lows and, in combination with Dollar's growing momentum, a break lower may take prices all the way to 1.1450 .
Commodities aligned their trajectories yesterday with both Gold and Oil trending lower. Gold was once again unable to withstand the pressure from the rallying US Dollar and broke below the $1,195 level. Given the lack of any catalysts in favor of the yellow metal and expectations for strong NFPs on Friday we may see Gold retreating further towards the $1,185 level. Oil turned negative as well with prices dropping below the key $70 area again on expectations that US stockpiles have increased. Fresh data is pending for release today and tomorrow with the API and EIA reports on the docket and if indeed stockpiles have climbed then prices would retreat further towards the $68.50 area.
Equities were in the red yesterday with the European markets leading the losses that spilled over in the US session. It seems that as the US indices were trending close to their recent highs investors have started wondering how long this bull rally could last before we see a correction. Even though we think that US equities still have some room to grow, the short-term bias is bearish today with all futures on both sides of the Atlantic pointing lower. The FTSE 100 and the DAX are the instruments to keep an eye on as they are both about to test important support levels and a move below them would signal a further deterioration in investors' sentiment.
MARKET EVENTS TO WATCH
- Eurozone Services PMI - 12pm
- UK Services PMI - 12.30pm
- Euro-Zone Retail Sales - 1pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Market Research