The Dollar edged lower for yet another day yesterday as investors are trying to make sense of Fed officials' comments regarding their interest rate policy. The Euro, the Yen and Gold all benefited from greenback's continued respite and with this week being light in terms of events and volume, in light of Thanksgiving, the Dollar will struggle to get its mojo back. The Pound sustained its recent gains to trade around 1.2850 as Theresa May heads to Brussels today to discuss the Brexit agreement at hand. Equities ended the day in the red and this morning futures in Europe and the US are trending lower with Asia deep in losses.
Investors are attempting to understand whether the Fed is suddenly turning bearish or whether they believe more cautiousness is needed now and markets simply underestimated the impact of a potential global slowdown on Fed's plans. Both Powell and Clarida spoke about headwinds facing the US economy last week, hinting on trade war, and with talks between the US and China going nowhere fast, hopes that some constructive progress will be achieved during the G-20 meeting have diminished.
As such, market participants seem to take this lack of progress as a risk that may force the Fed to slow down its rate hiking schedule next year and are taking some exposure off the Dollar, a trend we expect to continue this week with the Euro likely to extend gains towards 1.15 while Dollar/Yen may go all the way to 112. Keep in mind that with markets closed on Thursday and a half day on Friday liquidity will be thinner, which may magnify any moves in the currency markets.
The Pound continues to tread water around the 1.2850 level after PM May seems to have survived a leadership challenge at this point. The British PM is heading to Brussels today for talks with her European colleagues on finalizing the Brexit draft before she brings it to Parliament. As mentioned yesterday, the stakes couldn't be any higher for the UK currency when May seeks to get the draft approved by the Commons: a potential ratification will send Sterling soaring to 1.32 immediately and possibly to 1.35 in extension while a rejection will most likely lead to elections and the Pound dropping to 1.25 as uncertainty will be gripping investors again.
Gold is hovering just below the $1,225 level for the past 24 hours trying to break above this key interim resistance. A continuation of Dollar's under-performance will allow the yellow metal to trend higher and should this level give in then the next area we'll be focusing on lies around the $1,235 mark. Oil dipped lower yesterday but immediately recovered suggesting that demand is still there; however, as long as there's lingering uncertainty around how much OPEC will reduce production no clear trend will be able to form.
Equities in Asia are trading deep in negative territory following a bearish day in Europe and the US. The lack of progress in the US-China talks disappointed investors and VP Pence's remarks didn't help risk sentiment. This morning futures on both sides of the Atlantic are pointing lower suggesting that we should be in for yet another negative day for equities around the world.
MARKET EVENTS TO WATCH
- BOE's Carney testifies in London - 2pm
- US Housing Starts - 5.30pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research