A positive start of the week for currencies and equities yesterday gives way to a cautious Tuesday as investors are again focused on the key geopolitical issues. Euphoria in high beta currencies was the main theme of the markets on Monday after President Trump decided to delay imposing fresh tariffs on Chinese goods ahead of a high-level meeting with the Asian nation to arrive to an agreement. The commodity dollars benefited the most with the exception of the Loonie that was dragged lower from a correction in Oil prices. The Euro struggled to break into higher ground though, while the Pound rallies to 1.3150 this morning. Gold continues to consolidate, but not for long.
President Trump's decision to delay raising the levies versus China infused the markets with a risk-on bias and price action for the rest of the week should come along the same lines. Apart from Trump's decision though, Fed Chairman Powell's two-day testimony ahead of Congress will also play a role in dictating direction going forward. The head of the Fed is expected to reiterate his “patient and data dependent” approach in regards to interest rate policy, which should be a positive catalyst for equities but also a boon for currencies versus the Dollar.
The US currency is expected to under-perform versus the Euro and the Pound as the Fed stays put for the foreseeable future. The Euro holds around the 1.1360 mark, not being able to break above this key short-term resistance for the time being; however, the risk-on bias along with cautious remarks from Powell today and tomorrow should allow prices to break towards the 1.14 area. Dollar/Yen is a different story though as the combination of a weaker greenback ahead of Powell's testimony and lower safe-haven demand for the Yen amid cooling trade tensions should keep the currency pair trading sideways between 110.20 and 111.20.
Sterling continues to show resounding strength even though the UK is heading towards the Brexit date with no final agreement on the table. Speculation that PM May will be forced to ask for a delay and rumors that the EU side is prepared to provide the necessary time to arrive to an agreement is keeping the British currency supported though. May will be holding a meeting with her Cabinet today seeking consensus to ask for a delay in Article 50, which if requested and approved will push the Pound to new highs with the 1.3220 highs coming into focus.
Gold consolidates around $1,330 as the lack of a proper catalyst keeps traders looking for direction. Even though the easing of trade tensions between the US and China drove prices lower, it looks more likely that a cautious and patient Powell will weaken the Dollar over the next 48 hours and allow Gold to travel higher again. A break above $1,333 will expose the $1,337 and $1,342 levels in extension.
Oil takes a plunge dropping below $56 after a verbal “Twitter intervention” from President Trump that thought that prices are getting too high and asked OPEC to “relax and take it easy”. Nevertheless, sources within the organization suggest that more production curbs should be expected when the group meets in April so the broader outlook remains positive. In the interim though, a break above the $55.50 level is needed for a new bullish run to kick off.
Equities started the week on positive footing scoring gains across the globe on the back of Trump's decision to delay raising the tariffs versus China. However, the small extent in which equities gained yesterday and this morning's bearish reversal in the futures on both sides of the pond suggest that investors had already priced in Trump's decision on the back of the promising signs early last week. As such, global stocks now need a fresh catalyst to drive higher and we believe that Powell's testimony might be just that. So, even though the markets looked poised to take a breather today we expect this to be only a short respite which will allow stocks to travel higher again in the days to come.
MARKET EVENTS TO WATCH
- BOE's Carney appears before a Parliament Committee - 2pm
- US Housing Starts - 5.30pm
- Fed's Powell testifies before Senate Banking Panel - 7pm
- US Consumer Confidence Index - 7pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research