Wednesday, July 17, 2019

Strong US data boosts the Dollar while Trump threatens more tariffs again

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

MORNING BRIEFING

The Dollar pushed higher yesterday on the back of a stronger than expected US retail sales report that beat expectations by a wide margin. Consumer spending came in at 0.4% compared to the 0.1% predicted level helping the US currency extend its gains against the rest of the majors. The focus today turns on Europe where the release of the inflation figures from Europe and the UK will take a toll on the price action of the Euro and Sterling. Gold exited its wedge pattern to the downside after the US retail sales report and Oil declined after Trump spoke about easing tensions with Iran.

Consumer spending in the US continues to show signs of strength with the retail sales data indicating that the demand is still there despite the slowdown in domestic growth. The better than expected figures helped push the Dollar to fresh highs, with the European currencies succumbing to the pressure from the greenback’s side while the Yen and the Franc also turned to the downside. Still, Jerome Powell echoed his Congressional testimony when speaking in Paris yesterday, solidifying the case for a cut in July. As such, fresh data from the US, namely the GDP report next week, should only shape expectations on whether the Fed will follow up with another rate cut soon or stay put for the foreseeable future. We expect the Dollar to remain well supported in the interim as a lower interest rates’ regime has been priced in and the odds for more aggressive easing are currently low.

The Euro moved lower over the past 24 hours as the bearish ZEW Survey released yesterday piled on the already dovish outlook for the European currency. Like we said yesterday “Europe has been suffering by the global slowdown in growth and with the ECB also holding a dovish outlook for the economy, the data should probably come in softer” and indeed it did. As a result, prices dropped all the way to the 1.12 area with the selling action further supported by the strong US figures and today’s Eurozone inflation reading should do little to change the negative bias.

Meanwhile, the Pound was also very weak yesterday as the PM race in the UK has turned into a contest of who will take a harder stance on Brexit. Despite the new European Commission chief, Ursula von der Leyen, suggesting that she’s in favor of a longer Brexit delay if needed, the statement only served to prolong the uncertainty surrounding the manner of Britain’s departure from the Union. The labor market figures printed in a positive manner but Cable retreated to 1.24 for the first time in more than 2 years and today’s inflation data should not be enough to help the Pound recover. Even if the monthly gauge of price pressures prints stronger than last month, the bearish bias on Sterling will persist and any short-term relief rallies will probably prove short-lived.

Gold moved to the downside after the strong US data boosted the greenback and prices are now poised to test the $1,400 psychological and technical support. A break lower from here can easily send Gold a good $15 to the downside while President Trump’s comment that there’s progress in the standoff with Iran sent Oil prices lower, easing inflation expectations and potentially removing a bullish catalyst for the yellow metal. Having said that, we need to monitor the US-China situation too as Trump also suggested that he could impose fresh tariffs on the Asian nation; if the situation re-escalates Gold will push higher again, otherwise we should look for a move towards the $1,385 area.

Finally, US equities ended the day with small losses as stock traders see the odds for an aggressive Fed easing reducing after the US continues to post better than expected results. Europe was in the green but already the futures’ market is pointing lower this morning. Trump’s threat to impose more tariffs on China is mentioned as a potential reason why the Fed would cut rates by 50bps this month and thus help equities extend their recent rallies. However, it is our opinion that this sounds more like wishful thinking from the bulls’ side that sees the “Fed put” as maybe the only supporting catalyst that would send equities higher in the long term.

MARKET EVENTS TO WATCH

  • UK Consumer Price Index - 12.30pm
  • Eurozone Consumer Price Index - 1pm
  • DOE U.S. Crude Oil Inventories - 6.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research