Thursday, May 23, 2019

Fed stays patient but the Dollar may be in risk, Euro and Pound continue to suffer

Tags
  • Dollar
  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks
  • Oil

MORNING BRIEFING

The European elections kick off today across 28 countries in the European Union and with populism on the rise, the Euro may come under more pressure. The elections will take place during the next 3 days and the results will come in during the weekend so depending on how the Euro-skeptic parties perform this may be another blow to the already weakened currency. Meanwhile, Theresa May suffered another loss after the House of Commons leader Andrea Leadsom resigned in protest over the PM's handling of Brexit. The Dollar extended its gains after the FOMC minutes' release, equities were mildly negative with Gold unchanged and Oil giving up more ground.

Starting with the Euro, Mario Draghi's speech in Frankfurt produced no fireworks and even though the Single currency attempted to climb during the London session, the end of the day found prices trading around the same 1.1150 area. Looking ahead, the European Parliament elections take center stage and the question is whether the populist, anti-EU sentiment will be the key takeaway from this event. We should be in a place to assess the outcome of the elections after the polls close, so Monday's open will be a telling sign. In the meantime, the release of the Eurozone PMI and IFO Survey figures today will keep investors busy and with economists expecting a steady printing, the Euro may continue trading near its lows. Of course, the broader bias does point lower and a break below the near-term 1.1150 support clears the path towards 1.11.

Elsewhere, Sterling doesn't look able to find a bottom with fresh headlines spelling even more trouble for Theresa May. Commons' leader Leadsom was the latest member of Parliament to resign in protest and adding to that, the rise of the far-right Brexit Party, led by Nigel Farage, suggests that the Tories are about to suffer defeat in the European elections. Will this be the final blow to Theresa May? It remains to be seen but the consensus is that her days are numbered.

What's to come though is more important: if the Tories believe that, given the Brexit Party's popularity, the British people want an exit from the Union in any way possible, then they will likely elect a pro-Brexit hardliner to lead them after May's departure. This would send the odds of a no-deal scenario through the roof and clearly the Pound would suffer more. With prices holding around 1.2650 this morning, a strong showing for Farage and rumors that May could be replaced by someone like Boris Johnson would drive Sterling to 1.25 in a hurry.

The Dollar edged higher versus the European currencies but lost ground against the Yen. The FOMC minutes revealed a patient approach from the Fed, that had nothing to say in regards to potentially lowering interest rates any time soon. This is keeping the US currency well supported for now but there are more risks ahead for the greenback. With the 10-year UST yields pointing lower, the Durable Goods report, pending for release tomorrow, may be a reason for concern. Economists are expecting a negative reading that would indicate another pocket of slowdown in the domestic economy. Dollar/Yen is trading above 110 but a bearish printing tomorrow will bring the 109.80 and 109.50 areas back in focus.

Gold remained completely unchanged yesterday hovering near the $1,275 area, waiting for a new catalyst to drive the price action. However, given the decline seen in the Treasury yields, the bearish opening bell expected in Europe and the US and the potential of a softer US Durable Goods report tomorrow, the odds for a move higher are mounting. If prices manage to break above $1,280 then an extension towards the $1,285 level can be seen. Oil on the other hand broke lower, making its way to the $61 mark; there's a strong support near the $60.50 area so a bounce may be the next move, otherwise the next area of interest is found near the $58 level.

Equities were mostly negative yesterday with the US markets around 0.35% in the red while Europe closed almost flat. This morning though futures on both sides of the pond are trending lower, following the release of the FOMC minutes last night. Were investors hoping for a more bullish Fed guidance or expecting any hints towards rate cuts? In either case, they were disappointed and with very few positive catalysts in play right now, equities seem to be poised for a bearish session.

MARKET EVENTS TO WATCH

  • Eurozone Manufacturing PMI - 12pm
  • Eurozone Services PMI - 12pm
  • German IFO Business Climate - 12pm
  • ECB to release April Monetary Policy meeting minutes - 3.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research