Friday, May 17, 2019

The Dollar gains towards the end of the week but the way forward might not be as bright as it seems.

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

MORNING BRIEFING

The Dollar continues to attract strong demand amid the weakness seen in its peers' domestic economies. Despite the recent disappointment in the US retail sales figures, the greenback got its mojo back and trends higher towards the end of the week. The Euro and the Pound retreated further with Germany's performance and UK labor market's fragility the main concerns for investors. Equities were positive nevertheless but Gold succumb to Dollar's advance, with Oil moving above $63.

The US currency got a boost from the better than expected housing data yesterday but most of its momentum comes on the back of concerns about the performance of the other major economies. Starting with the Euro, even though Trump decided not to impose tariffs on European auto imports, the fact that the trade war is back on threatens to take a further toll on the export-focused economies, like Germany. Adding to that, inflation remains one of the main reasons why investors stay defensive in regards to the shared currency with ECB's TLTRO announcement next month regarded as the main risk for the Euro. A larger than expected easing program will attempt to reinvigorate the Eurozone economy but it will also weaken the shared currency in the medium term. In the near term, prices have already broken below 1.12 again and the next area of focus come around the 1.1150 mark.

Sterling was the weakest performer of the day as prices dropped to 1.28, extending the decline during the current month to 400 pips or close to 3%. Theresa May's future is in jeopardy - as it has been ever since the Withdrawal bill was repeatedly rejected in the Commons - but the main concern is now the labor market. During the previous months, employment figures have been one of the key reasons why the British currency was faring relatively well amid the Brexit uncertainty. However, this week's wage growth miss didn't go down well with investors and with zero progress seen in finally getting Brexit to the finish line, the bias for Sterling is clearly negative. The selloff during the past couple of weeks does seem a bit over-stretched but fundamentals trump technicals in such occasions so a further move towards 1.27 seems likely.

Going back to the Dollar, the gains seen over the past 24 hours lack any strong fundamental backing so we're unsure whether they can be sustained. Granted, the performance of the other economies, like Europe, the UK and China-correlated markets like Australia and New Zealand don't inspire much confidence so we wouldn't expect a reversal of the losses there, but Dollar/Yen and Gold appear to have lost ground for little reason. As such, we regard their recent moves as a short-term pullback and today's University of Michigan Sentiment report may be the catalyst that would disappoint the Dollar bulls again. Dollar/Yen traded to 110 overnight but prices are already declining this morning so a bearish UoM reading would bring the 109 lows back into focus.

Gold seems to have lost most of the momentum that drove it to the $1,300 area but the fundamental reasons behind its ascent remain valid. Renewed trade tensions have led equities lower this month and with the dispute far from resolved the uncertainty will persist, bringing the yellow metal to the forefront again. Furthermore, recent US data continues to disappoint more often than excite investors, so Gold's rally may resume soon. The $1,300 level is a key area but if - and when - it gives in, we should see a more pronounced move higher. In the interim, today's price action will depend on how the Dollar trades so the focus is on the UoM Sentiment reading, where a miss would bring Gold closer to the $1,295 area.

Equities ended the day in positive territory yesterday despite early indications for a bearish session. This morning, again futures on both sides of the pond are pointing lower so it will be interesting to see how the week ends after a series of nervous sessions. Earlier headlines in regards to a potential lack of interest from the Chinese side to continue negotiating with the US at this time are dampening sentiment again so our call for a lack of clear direction in equities in the near term remains valid.

MARKET EVENTS TO WATCH

  • Euro-Zone Consumer Price Index - 1pm
  • Univers. of Michigan Sentiment - 6pm

All times are GMT +4.