The Dollar started the week on positive footing on the back of political uncertainty in Europe, continued threats of trade tariffs and stronger than expected US data. The focus at the start of the month is on European politics and even though Angela Merkel managed to find a solution to the immigration stalemate with her sister party, investors are now eyeing the progress in the Brexit agenda. Prime Minister May is conducting one-to-one meetings with her cabinet members trying to agree on a blueprint for UK's future relation with the EU. Equities in Asia remain under pressure as the Chinese Yuan depreciates but the European futures allow room for some optimism this morning.
The Dollar dominated the price action yesterday surging higher almost across the board. Stronger US Manufacturing data combined with a risk-off bias and expectations for an upbeat Fed rhetoric in Thursday's FOMC minutes propelled the greenback higher. It is a strong start of the month for the US currency as the domestic economy is steaming ahead; a rebound in Factory Orders and an improvement in Durable Goods Orders today would do wonders to extend Dollar's move higher. Dollar/Yen remains capped below 111.00 but more demand for the US currency will drive prices towards the 111.50 highs.
The Euro was able to recover overnight when Merkel was able to defuse the disagreement with her coalition partner that was threatening to upend her administration. The shared currency was lower on the back of the political uncertainty and Dollar's surge hitting 1.16 but was able to claw back 50 pips to trade to 1.1650. Today's price action will depend on the continuation of the Dollar rally and the release of the Eurozone Retail Sales. More downwards pressure will drive prices back to the 1.16 mark and a penetration of this support will bring 1.1550 in focus.
The Pound is also recovering from its losses yesterday edging towards the 1.3150 area. The spotlight falls on PM May's attempt to unify her administration behind a comprehensive plan detailing the relations with the EU post-Brexit ahead of Friday's crucial cabinet meeting. News from this front will dictate price action today while traders will also be keeping an eye on the Construction PMI data; yesterday's Manufacturing report printed stronger than expected but tomorrow's Services printing will be more important. To the upside, the resistance for Cable is at 1.32 while a break below yesterday's 1.31 lows will clear the path towards the 1.3050 area.
Oil is leading the gains for commodities pushing towards $75 as Saudi Arabia's increase in production was merely enough to offset losses from other members of OPEC. Even though Oil's uptrend remains intact, prices are entering an area of technical resistance and with the rally clearly overstretched we should be prepared for a technical pullback. Fundamentals are in favor of more gains but with Trump criticizing OPEC's agenda and technicals calling for a pullback investors might decide to take some profits off the table in the short-term. Gold hit the $1,240 target we highlighted yesterday and more Dollar strength could lead prices as low as $1,230.
Equities in Asia are deep in the red following the continued depreciation of the Chinese Yuan while concerns on whether the US trade levies threaten China's growth send regional bourses lower. The European and US futures however paint a different picture with almost all the markets trending towards a positive opening bell. Whether this change in bias is a reaction to the resolution in German politics or just a short-term bounce remains to be seen. Having said that and given that most indices are trading just above key support levels, vigilance is advised as a quick change in sentiment could threaten these lows and clear the path for more losses.
MARKET EVENTS TO WATCH
- UK Construction PMI - 12.30pm
- US Factory Orders - 6pm
- US Durable Goods Orders - 6pm
All times are GMT +4.