Tuesday, January 8, 2019

Improved risk sentiment helps currencies and equities push higher

Tags
  • Dollar
  • Gold
  • Yen
  • Euro
  • Pound

MORNING BRIEFING

An improvement in risk sentiment in light of the US-China talks continues to support high beta currencies and equities distracting investors from the potential of a global slowdown during 2019. The Euro and the Pound extended their recent rallies along the commodity dollars, as the greenback retreated almost across the board. Fresh data from the Eurozone beat expectations while the US Services figures came in softer than expected, solidifying the Fed's more dovish stance. Gold suffered once more from the reduced risk aversion while Oil edges towards the key $50 mark.

Starting our overview with the Euro, the shared currency came close to testing the significant 1.15 resistance yesterday, supported by the better than expected German and Eurozone retail sales data. Today though the Industrial Production and Confidence data should not provide the same kind of uplift, hence the Euro is currently correcting to test the 1.14 support. As mentioned yesterday though, our medium-term outlook for the Euro points higher on the back of the improved geopolitical sentiment and US domestic under-performance, which casts doubts on Fed's rate hikes' policy and the strength of the Dollar. That being said, we first need to see a clean break above 1.15 and when that happens we will be targeting the 1.16 mark as the next area of interest.

The Pound continued moving higher yesterday almost reaching the 1.28 figure on the back of Dollar's respite. BoE Governor Mark Carney will be speaking tomorrow and chances are that he will reiterate his cautious outlook ahead of the key Brexit vote, expected to take place on January 15th. We've laid out our scenarios for Sterling in our start-of-the-year overview but in the short-term it looks more likely that the Pound will retreat to re-test the 1.27 support at some point: there's a technical divergence between the price action and the momentum on the hourly charts that suggests that 1.28 is the near-term ceiling for the Pound right now.

Dollar/Yen looks poised for more gains in the short term, underpinned by the improvement in risk sentiment given that China and the US are back at the negotiating table. Risk aversion flows have been reduced over the past couple of days and prices are currently trading around 119, taking back all of the losses seen during the “flash crash” last week. Having said that, does that change our broader outlook? We believe it's still too early to expect a resolution in the trade dispute between the US and China and given the continued under-performance of US data, Dollar/Yen seems vulnerable to more losses in the medium-term.

Gold retreated once again after a second attempt to reach the $1,300 mark. This time prices only reached as high as $1,295 before renewed selling pressure pushed the yellow metal to the downside. It seems that investors are taking some money off the table after the extended rally seen at the end of 2018 and depending on the progress of the trade talks this correction may have more room to the downside; however, our medium-term outlook for Gold still calls for more gains during the first half of 2019 in expectation of a weaker US Dollar. Oil rallied all the way to $49.80 yesterday but pulled back to consolidate $1 lower; this level is a key resistance for the black gold and now is the time to see whether the upcoming production cuts will force prices to move higher in a sustained manner.

Finally, equities had a mixed day yesterday with the US markets closing in positive territory while Europe was mixed. This morning Asia is trading higher and the European and US futures are pricing in a positive opening bell with marginal gains for all the global stock indices. The key catalyst here is the US-China trade talks and investors are hoping for some kind of progress that will allow equities to recover, while the recent downbeat tone coming from the Fed is also helping things amid expectations for fewer rate hikes. However, investors will now start focusing on the US earnings' season and it will be key to see whether corporate results continue to slow down, further dampening risk sentiment.

MARKET EVENTS TO WATCH

  • Euro-Zone Consumer Confidence – 2pm
  • Euro-Zone Industrial Confidence - 2pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research