Wednesday, June 26, 2019

The Dollar sees a relief rally despite Fed’s dovish outlook and bearish US data

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

MORNING BRIEFING

The Dollar got a boost to the upside yesterday despite a consistent bearish tone from the Fed and disappointing fresh US data. The US currency managed to claw back some of the lost ground versus its peers even though Fed Chairman Powell confirmed that they’re monitoring incoming data and are ready to act as necessary. Sterling saw most of the losses as Boris Johnson repeated his intention to take the UK out of the EU in any way possible. Equities were in the red across the globe, Gold eased off its highs but Oil continues to advance.

The release of the US Consumer Confidence report yesterday was yet another piece of bearish data from the States, with the index dropping almost 10 points from its last month’s reading. At the same time, Jerome Powell didn’t say anything to make the Dollar bulls think that a July cut is less likely but despite all odds the Dollar managed to recover slightly over the past 24 hours. Taking a closer look at the drivers behind this correction though, we have to note that the instruments that declined were mainly the Euro, the Pound, Yen and Gold which makes us wonder what’s next.

Obviously, we have voiced our doubts on whether the downtrend for the Dollar versus the Euro and Sterling can be sustained and yesterday’s action falls in line with our thesis but the moves on the Yen and Gold are intriguing. Looking ahead, the way forward in the short term will be dictated by fresh figures coming in from the US today with the Durable Goods Orders being a key precursor of where domestic growth is heading. Economists are expecting a better set of data compared to last month’s disappointing report and, should this be the case, the greenback may see a further extension of its recovery in the near term.

Meanwhile, Sterling was traveling south throughout the day yesterday on a combination of technical and sentiment-based factors. The British currency had reached the 1.2780 level which is a key medium-term resistance on the back of the weakness seen in the Dollar but it seems that the bulls didn’t have enough conviction to push prices through this mark. At the same time, Boris Johnson who is tipped to be the next British PM, repeated his views that the UK will leave the Union one way or another on October 31st reminding traders that Brexit is no closer to being finalized. Prices have now dropped close to 1.2650 and should this support level give in, then we may see a further correction towards the 1.26 floor.

Gold took a breather yesterday coming off its recent highs and declined towards the $1,400 area. As mentioned above, it’s interesting to see that the Dollar was able to recapture some of the lost ground against the yellow metal, given that the conditions that drove prices to their recent highs have not changed. As such, the case for Gold remains bullish until we see a material change in the catalysts we consider key in shaping its outlook, namely the rise in geopolitical tensions, the elevated Oil prices nudging inflation expectations higher and Fed’s intention to cut rates soon.

Finally, equities ended the day below water yesterday despite the lack of any significant changes to the status quo. It is clear that investors are eyeing the G-20 meeting in Osaka, hoping for a breakthrough in the trade dispute between the US and China. However, the odds for a meaningful improvement in the standoff between the two countries are low and the most optimistic scenario would call for a positive tone coming out of the Trump-Xi meeting, which will prolong the uncertainty though. As such, equity futures are pointing slightly lower this morning as market participants are sitting on the sidelines for now in expectation of the high-level sit-down at the end of the week.

MARKET EVENTS TO WATCH

  • US Durable Goods Orders - 4.30pm
  • US Advance Goods Trade Balance - 4.30pm
  • US U.S. Crude Oil Inventories - 6.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research