Thursday, January 10, 2019

Markets take a pause as trade talks conclude, Dollar takes a hit from Fed minutes

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

MORNING BRIEFING

The rally in the global currency and equity markets takes a pause as trade talks conclude with positive but not exciting news while Chinese inflation figures again underscore the slowdown in the Asian nation. At the same time, the government shutdown in the US enter its 20th day, with President Trump threatening to extend it until the now divided Congress funds his wall with Mexico. The Euro did break into higher ground though while the Dollar retreated across the board, Gold rallies once more and Oil crosses above $52.

The Dollar had another lackluster day yesterday even though the outcome of the trade talks didn't exactly excite investors. The two sides made good progress but didn't agree on any concrete measures that would signal the end of the trade war or at least an extended truce. Still the Dollar didn't gain on the back of this rather disappointing conclusion and this should be attributed to the Fed minutes' release which underpins the recent bias around the greenback.

The FOMC minutes revealed that the US policymakers prefer to take a patient approach in regards to further rate hikes in light of “downside risks that may have increased”. This rhetoric falls in line with Jerome Powell's recent dovish remarks where he said that interest rates policy is “data dependent”, which means that they will take a wait-and-see approach. This simply suggests that we shouldn't expect a rate hike in Q1, and this is a clearly bearish catalyst for the Dollar and explains its downbeat tone at this stage.

The Euro translated this continued Dollar weakness into fresh gains yesterday breaking above the 1.15 barrier, maybe even earlier than we would have expected. In any case, the 1.15 figure had capped Euro's upside since mid-November last year and the break above it signals a bullish tilt in the currency's outlook. What will be important though is for the Euro to stay above this level to confirm the bullish breakout and today's ECB account of the December meeting might be a key catalyst in that direction.

The statement will describe the central bank's thinking and its tone will hint investors on a possible date for the ECB to start raising rates. Currently, expectations are set for a move after the end of the summer but if the ECB sounds concerned about the recent market volatility and geopolitical backdrop, then these expectations may be pushed further into the future. If this proves to be the case, it's likely that the Euro will correct and retest the 1.1480 support; if it manages to stay above this level a further extension towards 1.16 is in the cards.

Gold reversed its bearish bias and moved higher again yesterday as the US-China trade talks didn't result into any concrete progress and the Dollar took another hit from the cautious Fed minutes. Prices are now ready to challenge the $1,295 resistance again and this will be a crucial test: if Gold breaks higher then $1,305 is the next stop, otherwise a consolidation between $1,280 and $1,295 looks likely. Oil hit $54 per barrel over the past 48 hours, even though it's currently hovering just below this level. The bias remains bullish for the black gold and we continue to look towards $54 as our short-term target.

Equities ended higher yesterday but today's price action is expected to be on the bearish side. The Asian markets are trading in the red this morning and futures on either side of the pond are pointing lower. Maybe investors were hoping for some material progress in the US-China trade talks which would sooth their worries of a global slowdown while at the same time the fresh Chinese inflation data doesn't help stoke recent optimism. In any case, the bias for the equity markets remains promising given the current dovish Fed guidance so we'll have to wait and see whether this will be just a pullback before stocks push towards higher ground again.

MARKET EVENTS TO WATCH

  • ECB Publishes Account of Dec. 12-13 Governing Council Meeting – 4.30pm
  • US Initial Jobless Claims - 5.30pm
  • Fed’s Powell to Speak to The Economic Club of Washington - 9pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research