Friday, September 28, 2018

Stronger US data and Italy's defiance keep the Dollar in demand, drive the Euro lower

Tags
  • Dollar
  • Euro
  • Pound
  • Stocks

MORNING BRIEFING

The Dollar rallies higher towards the end of the week buoyed by better than expected US data after Fed's decision to raise interest rates. At the same time, the Euro remains under pressure not only by the surging greenback but also from Italy's decision to announce a budget deficit target of 2.4%, which puts it over the EU limits. Equities reversed a bearish opening yesterday to end the day above water while futures are pointing towards a muted opening bell this morning.

The takeaway of yesterdays' session was a strong rally for the Dollar that saw the US currency gaining across the board, including the Japanese Yen and Gold. This comes on the back of the Fed meeting where Powell's mention of potential rate cuts sparked a risk-off rally that benefited the greenback; yesterday's move though is also attributed to fresh, strong US data. According to the GDP report, the domestic economy is seeing its fastest growth in 4 years while the Durable Goods data was also impressive. With the domestic market improving at such a pace, Powell's remark about rate cuts and the threat of a global slowdown triggered by the escalating trade war take a backseat for now. How will this affect the major currency pairs?

In terms of the Euro, we have many times expressed our view that the medium-term outlook of the currency looks brighter, based on the improving Eurozone data and ECB's optimism. Today's Eurozone inflation data might come at the right time to support Draghi's reference to inflation pointing higher so an uptick in today's report could support the Euro and help limit its losses. Currently the shared currency is testing the 1.1650 support and if it manages to remain above it, we may eventually see a reversal towards the 1.17 area. Otherwise, a deeper correction fueled by the developing situation in Italy will drive prices towards 1.1550.

The Pound pushes lower towards the 1.3050 support as we expected with the Dollar applying most of the pressure and investors disregarding positive comments from EU's Barnier. This is a key support level and if the UK currency manages to hold above it then we should see consolidation between 1.3050 and 1.32; otherwise a break lower exposes the 1.2950 area. For Dollar/Yen, the rally to 113.50 indicates that the Dollar bulls are back in control and this clears the path towards the 114 level, which will be our target as long as the currency pair holds above the 113 mark.

Gold finally showed signs of life breaking to the downside to trade close to $1,180 reacting to Dollar's strength. This might be an indication that the tight range we've witnessed recently is now over and a new leg lower is developing; for this to be confirmed though Gold needs to break the $1,180 support to trend $20 lower. Oil is building a sideways trading range between $71.50 and $72.50 which supports the upside potential; as long as things stand as they are we remain confident of our $73-74 target.

Equities had a positive day yesterday but this morning Italy's troubles seem to resurface pushing the European markets' futures lower. As it seems, the coalition government in Italy has agreed to a budget deficit of 2.4% which is way over EU's limits and if this gets signed then more clouds can be seen in the horizon. The US markets are also expected to open marginally lower today so we may be in for a cautious end of the week.

MARKET EVENTS TO WATCH

  • Euro-Zone Consumer Price Index - 1pm
  • US Personal Consumption Expenditure - 4.30pm
  • U. of Mich. Sentiment - 6pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research

 
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