The Dollar ended last week on the back foot after the US Government was reopened and investors are now pricing in a round of softer US data. The Euro, the Yen and all the commodity dollars pushed higher on the back of Dollar's weakness while the Pound marched ahead hitting 1.32 before the end of the week. Gold was among the major winners of the day rallying to $1,305, equities ended the day in the green but are now trending lower and Oil hit $54 again.
The greenback didn't benefit from the end of the Government shutdown, as we had expected and mentioned a few times in our daily notes. The perception among market participants is that there's little bullish news for the Dollar to trade on: the shutdown took a toll on domestic productivity - and there are threats for another round soon if Trump doesn't get his wall funding - while the delayed US figures' reports will likely highlight the slowdown in the US economy. At the same time, the Fed meeting this week will not provide any support to the US currency as Jerome Powell will likely stick to his cautious tone and wait-and-see approach in regards to interest rates.
The only supporting pillar for the US currency at this point remains the labor market, where strong jobs creation and wage growth keeps the economy going. On Friday, the fresh Non-Farm Payrolls figures are expected to print in a positive fashion, but given last month's 300k printing, the bar for a positive surprise is really high. In any case, we expect the US currency to trade with a bearish bias at the start of the week, which should provide further support to the likes of the Yen. The currency is trading around the 109.30 mark this morning and further Dollar weakness exposes the 109 area.
The Euro is gaining after the greenback went on the defensive, even though the shared currency lacks any intrinsic catalysts for a sustained move higher in the short-term. We remain bullish on the Euro over the medium term but in the interim the price action will be dictated by Dollar's flows. As such, the Euro may extend its move towards the 1.1450 area before it encounters any meaningful resistance, with a view to extend it to 1.15.
The Pound on the other hand is already making strong gains, having hit 1.32 on Friday. This week the UK Parliament will vote on Theresa May's “plan B” and even though it's not likely it will pass, investors are pricing in the likelihood of an extension to Article 50 or a second referendum. As such, the Pound has more room to rally towards 1.33, especially if the Dollar remains weak.
Gold took advantage of Dollar's retreat and is now trading above $1,300 after consolidating between $1,285 and $1,295 for some time. Given our expectations for a weaker greenback ahead, the yellow metal has the opportunity to continue trending higher with the short-term target sitting around the $1,310-15 area. Oil continues to oscillate between $52 and $54, after comments from Saudi Arabia that “demand usually softens in the first quarter”. Nevertheless, we remain positive over its outlook and we expect another test of the $54 area before prices eventually break into higher ground.
Equities had a strong finish last week with the major US and European indices scoring gains. However, this morning the Asian markets are trading in the red and futures on both sides of the Atlantic are trending lower. The prospect of weaker earnings' growth during the past quarter, uncertainty regarding the US-China trade relations and threats that the US President might shut down the government again soon are creating a bearish bias.
MARKET EVENTS TO WATCH
- ECB's Draghi Speaks in European Parliament in Brussels – 6pm
- BOE's Carney, Broadbent, Ramsden and Place speak at event - 6.30pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research