A broader improvement in risk appetite helped the European and commodity currencies come off their lows yesterday with the US Dollar mostly lower against its peers. Does this rally have further room to grow and will the Dollar enter a corrective phase? This remains to be seen. Equities had a mostly positive day yesterday but the European markets are expected to open in a mixed manner this morning.
Traders were pleased to see that risk appetite is returning to the markets with the Euro, the Australian and New Zealand Dollars and Gold all advancing higher. At the same time, the US Dollar was higher versus the Japanese Yen and with equities also ending the day above water we're looking at a coordinated tilt towards higher beta instruments. This is quite a development coming off the back of recent news that the US considers to increase tariffs versus China, with the Asian nation planning to retaliate in kind. Does this mean that investors have grown tired of being in the defensive?
The answer is not clear yet. From a fundamental perspective the Dollar should still be in demand based on Fed's higher interest rate policy, the domestic growth differentials between the US and the rest of the major economies and the elevated geopolitical risks on the back of the trade dispute between US and China. So to be able to suggest that a broader change in sentiment is taking place we need further evidence and a continued downside for safe haven instruments.
Taking a look at the day ahead, the lack of any important events or reports will again allow price action to be dictated by sentiment around the trade spat between US and China. In terms of the instruments in action, the Euro is trading around the 1.1620 area; a continuation higher points towards the 1.17 level while a bearish change in sentiment will again drives prices towards 1.1520. The Pound lagged behind the Euro yesterday and remained close to the 1.2950 level as Brexit-related headlines dampen its outlook; Sterling is oversold but fundamentals still point lower and a break below yesterday's lows will clear the path towards 1.2850.
Dollar/Yen attempted to rally yesterday but the upside seems capped at this stage which suggests that further downside is more likely. The currency pair continues to post lower highs so the technical outlook also points lower and a move below yesterday's lows would trigger another bearish leg with the 110.60 area coming into focus. Commodities have been trading inside a tightening range for the past 2 days suggesting that a breakout will come soon and this will dictate the new direction for Gold and Oil. Furthermore, the US Crude Oil inventories will also be released today and could act as a catalyst.
Equities had a mostly positive day yesterday but the Asian markets are mixed this morning. The past couple of days have been positive for global stocks with the US markets leading the gains and the European bourses following suit, which has allowed them to recover most of their previous losses. With the Dow and the S&P having broken above recent highs, the bias points higher for the European markets as well but futures on either side of the Atlantic are mixed at this time so we will see how the day unfolds.
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All times are GMT +4.
Written by Konstantinos Anthis, Head of Market Research