The Dollar sees a recovery at the end of the week along with a risk-on tilt on equities on the back of key indicators' releases from the US and China. The stronger than expected GDP data printed yesterday while a reading of China's manufacturing activity also beat expectations overnight. The Euro, the Pound and the Yen came under pressure while Gold further losses. At the same time, global equities are seen ending the week on a positive note boosted by the positive data from the US and China.
It was the surprisingly strong US Gross Domestic Product figures that prompted the recovery in the Dollar yesterday when the report came in at 2.6% annualized growth compared to expectations for a 2.2% reading. The question then becomes: will this rally last? We believe that this will largely depend on the way the US inflation figures will come in later today. Earlier in the week, we said that the US-related reports due to be released until the end of the week were expected to come in on the softer side. However, the GDP figures have caught Dollar bears off guard and it now comes down to inflation to either kill or extend the recovery.
Analysts are expecting a lower reading for the PCE Deflator report, one of of prices' pressure while the Core PCE report may come in a bit higher on a monthly basis. As such, in the short term hinges on how these a softer inflation reading will validate the Fed's intention to remain patient for a prolonged period of time in regards to interest rate policy while another surprisingly strong reading will send the greenback further to the upside. Dollar/Yen rallied to 111.80 on the back of the positive news from the US GDP release, extending the U-turn that kicked off on Wednesday. Will this be extended? Again, it depends on how the PCE data prints. If it does, then the next area of focus comes around the 112.20-30 level, otherwise a retreat towards 111.20 should be the next step.
The Euro retreated below 1.14 once again coming under pressure from the surging Dollar. Does this mean that the break above this key psychological and technical level was false? Again, the answer will depend on fresh incoming data from the Eurozone. The release of the Manufacturing PMIs from Italy, France, Germany and the Eurozone in total and the Eurozone inflation figures will dictate the price action for the Single currency. Expectations are calling for a bearish set of PMI inflation may tick higher this month. However, it seems that investors are taking a cautious approach in terms of the Euro for the time being so we wouldn't expect fresh highs today - unless EZ inflation skyrockets and US inflation tanks, which seems unlikely.
Gold saw a correction for yet another day yesterday as the rise in the Dollar put prices under pressure. The ascending trendline that kept Gold supported over the past 3 months has now been penetrated which begs the question whether the rally is over. This will largely depend on whether the $1,305 support holds or not. Should the Dollar see further gains today, this level will be tested and if it holds then a bounce towards $1,320 is likely. On the flip side, in case of a break to the downside, $1,296 will be the next area of interest. Oil steams ahead breaking above $57 once more and we should be close to hitting our $58 target, but also be wary in case prices stall around $57.50 again.
Equities were mixed yesterday with Europe in the green while the US markets ended the day below water. Nevertheless, futures on both sides of the Atlantic are pointing higher this morning on the back of the positive news in regards to the Chinese manufacturing figures. Risk aversion seems to be taking a for now so we should be in for a bullish ending to the week.
MARKET EVENTS TO WATCH
- Eurozone Manufacturing PMI - 1pm
- Euro-Zone Consumer Price Index - 2pm
- US PCE Core - 5.30pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research