Tuesday, February 5, 2019

The Dollar gains as the NFPs provided support, does the recovery have more room to grow?

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

MORNING BRIEFING

The Dollar extended its gains on Monday on the back of last week's surprisingly strong NFPs that acted as a lifeline for the US currency. The Euro and the Pound succumbed to the pressure from the surging greenback with both currencies seeing losses at the start of the week. Dollar/Yen has recovered from last week's decline and is now trading around 110 once again. Gold and Oil moved lower amid thinner trading volumes while equities were mixed with the US closing in positive territory and Europe slightly negative.

Today a host of fresh data from Europe, the UK and the US will attract investors' attention that strive to assess the medium-term outlook of currencies and equities. The most important release will be the Non-Manufacturing ISM figures from the US that will give us a glimpse into how the Services' sector fares in the States. Recent Dollar weakness was replaced by a bullish bias after Friday's NFP reading but concerns in regards to the other parts of the US economy linger. Today's ISM data is expected to come in softer, underpinning the string of weaker figures, but the margin of the printing could make all the difference.

Right now the Dollar is on an uptrend and it will take a significant miss in today's report to stop the greenback on its tracks. There's very little in terms of other pending reports from the US this week and barring an unpleasant surprise from the ISM data today, the Dollar should resume its short-term recovery. Does this alter our medium-term bearish outlook for the US currency? Not really, but we will keep an eye out for more figures as they continue coming in over the next couple of weeks.

The Euro and the Pound are pointing lower this morning as lagging growth and political struggles take their toll on the European majors. The Euro has come under pressure from the Dollar but at the same time, the recent data from the Euro area has not been great and today may similar. The Eurozone Retail Sales report alongside the Services PMIs are not expected to print in favor of the shared currency so a deeper correction towards 1.14 may be in the cards over the next 24 hours. The Pound's price action is dictated by the Brexit talks but the release of the Services PMI report today will likely come along the same bearish line; the data is expected to print softer and 1.30 seems the next target for Sterling.

Gold has pulled back over the past couple of days as Dollar's recovery has dragged prices lower. The yellow metal has come off its $1,325 highs and is currently trading around the $1,310 area, which we have designated as the short-term support. It seems that momentum is slowing down so Gold will make an attempt to bounce off this level and, if successful, it will consolidate between $1,310 and $1,325. Otherwise, a bearish break will take prices towards the $1,300 medium-term support level. Oil continues to threaten a break of the $55 resistance but for the time being the bulls cannot penetrate this area. We see two scenarios for the black gold: either prices will succeed to overcome the $55 barrier and look to move towards $58 or, in case of failure Oil will again retreat towards the $52 mark.

Equities had a mixed start for the week with the US markets closing above water while Europe was mostly flat. The broader geopolitical backdrop isn't exactly supportive of more gains for stocks and February will be a telling month. After the strong gains seen in January, time will tell whether investors will retain their bullish bias or whether they will be forced to come to grips with reality, which looks considerably bleaker. In any case, futures in Europe are pointing higher this morning while the US markets are expected to open slightly negative.

MARKET EVENTS TO WATCH

  • UK Services PMI - 1.30pm
  • Euro-Zone Retail Sales – 2pm
  • US ISM Non-Manufacturing/Services - 7pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research