At the end of the week the Dollar is again the major winner on the back of two key events for the US currency: the mid-term elections and Fed's interest rate decision. The greenback gained across the board overnight after the Fed released their decision to leave interest rates unchanged; the Euro, the Pound, Yen and Gold all pulled back as the Dollar pushed to the upside. Equities ended the day mostly below water with only the Dow Jones managing to close marginally higher and this morning equity futures on both sides of the Atlantic suggest a bearish opening bell.
The Federal Reserve left interest rates unchanged last night but on top of that they didn't change a single thing in their statement regarding domestic progress and growth. The Fed continued to appreciate the progress in the domestic economy, calling it “strong” yet again, and signaled that they intend to keep raising rates at the same gradual pace we've seen during 2018. There were no references to the recent deterioration in the data coming from the US which means that either the Fed see that as a transient occurrence or they feel they need more evidence before they start talking about a broader slowdown in the economy. In any case, the takeaway from their November statement is a positive one and it will provide more support to the Dollar.
So now that these two significant risk events are behind us, where does this leave the Dollar? Clearly the US currency came out of this week pretty much unscathed, if not stronger: the mid-terms unraveled as expected and the conciliatory tone coming from both sides of the aisle helped improve Dollar's outlook while the Fed statement was unequivocally hawkish. As such, the US currency should enjoy a continuation of its upwards rally, at least in the short term. Looking ahead, the Dollar should push higher putting its peers under pressure: the Euro trends towards 1.13, Dollar/Yen may go all the way to 114.50 and Gold may pull back as low as $1,215.
The Pound is the only instrument that may be the exception to the rule and we should treat it with more caution. Obviously the Dollar is in control here as well but we need to remember that, according to recent news, a Brexit deal is pretty much baked in. As such, any news on this front - or even rumors that the EU is prepared to accept it - could turn the tables quickly and send Sterling soaring. The short-term barrier stands at 1.3170 but the Pound has the potential to rally as high as 1.35 when a deal is finally reached.
Gold hits fresh lows as Dollar's momentum is proving too hard to resist and prices have now fallen below the $1,220 area. Yesterday we said that depending on the tone of the Fed statement, the yellow metal will test either the top or bottom end of its trading range; as such, with the Fed remaining hawkish as ever the path of least resistance points towards the $1,215 level for Gold. Oil is still pointing lower, we have nothing new to add to its outlook and this downward grind should continue until we hit the $59-60 support level.
After a few days of gains, equities are preparing to open in negative territory this morning following a mostly bearish day in Europe and the US yesterday. There's no clear indication of why investors are taking a defensive approach today on the back of the US elections and Fed's rate decision and statement. In any case, futures in Europe and the US are pointing slightly lower this morning so it looks like the end of the week will be a bearish one after a series of positive sessions for the global stock markets.
MARKET EVENTS TO WATCH
- UK Gross Domestic Product - 1.30pm
- U. of Mich. Sentiment - 7pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research