Monday, July 15, 2019

Fresh US data to dictate the Dollar’s direction this week, US retail sales on the docket

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

MORNING BRIEFING

The Dollar ended last week lower despite the stronger than expected US inflation report that beat expectations and casted doubts on whether the Fed should cut rates at the end of the month. The US currency lost fresh ground versus the Yen, the Franc and the antipodeans but the European currencies struggled to break into higher ground. Gold also looked to climb and managed to end the week around $1,420 while Oil saw a mild retreat to test the $60 mark. Equities were mostly in the green with the US indices posting record highs while Europe was only marginally above water.

Fresh US data pending for release over the next couple of weeks will be instrumental in pushing the Fed towards pulling the trigger during their July meeting. Currently, investors expect the US central bank to lower rates by 25bps at the end of the month and Jerome Powell’s remarks during his recent public appearances did suggest that the policymakers see the need for easing. However, the stronger than expected CPI reading last week suggested that inflation is ticking higher, which could prompt the Fed to wait a bit more.

Looking ahead and despite that the majority of the recent figures highlighted the slowdown in the US economy there are still two major reports pending for release between now and the July FOMC meeting: retail sales and GDP. Consumer spending will be in focus this week with the report due tomorrow and investors will be eager to see how the data prints. Economists are expecting a lower but still positive reading this time around but given how volatile the retail sales report has been in the past 6 months we should not drop our guard. A robust reading could prompt a short-term rally in the Dollar as the odds for a July cut will decrease somewhat and, more importantly, the case for an “one and done” approach from the Fed will solidify. Otherwise, a negative reading will underpin the calls asking for more aggressive easing and will push the greenback lower again.

Elsewhere, the Euro saw a rather choppy price action towards the end of the past week. The shared currency was initially lifted by the Fed’s intention to lower rates soon and prices were able to come off the 1.12 area; albeit, the recovery was quite modest, the Euro never broke into the 1.13 area and the upcoming data helps explain the lack of enthusiasm among the bulls. The Eurozone ZEW Survey is pending for release tomorrow and analysts expect a softer reading again, which will highlight the challenges in the Euro area. At the same time, ECB’s dovish bias is the other negative catalyst keeping the Euro under pressure and if the figures do print softer tomorrow we may see a fresh leg lower towards the 1.12 lows.

Gold found support ahead of the $1,400 level on Friday and picked up pace towards the upside again. The yellow metal climbed all the way to the $1,420 area but the interesting question is what happens next: prices have formed a wedge pattern on the short-term charts and the breakout from this will show us the way forward. A move above the $1,425 mark clears the path for Gold to retest the $1,435-40 area, otherwise if the $1,405 support gives in we should see prices pulling back towards the $1,385 level.

Finally, equities ended the week in a moderately positive manner. The Dow Jones and S&P indices posted fresh all-time highs as Fed’s bias to ease monetary policy at the end of the month creates a bullish environment for equity traders to keep pushing stocks to the upside. With most market participants debating whether a 25 or 50bps rate cut is more appropriate - meaning that a move in July is pretty much guaranteed from a trader’s perspective - the short-term direction for equities should remain positive.

MARKET EVENTS TO WATCH

  • US Empire Manufacturing - 4.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research