Friday, June 21, 2019

The Dollar sees more weakness but what about its longer term outlook?

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

MORNING BRIEFING

The Dollar continued its decline yesterday on the back of the FOMC decision to hint on one or more rate cuts this year with the rest of the majors capitalizing on its weakness. The US currency saw a broad retreat across the board but truth be told, we’re not impressed with the magnitude of the losses, which is a testament to the lack of investors’ confidence on the other major currencies. We have voiced our doubts on whether the greenback can experience a long-lasting decline, despite the fact that the Fed intends to ease its policy, and we base this on the relative over-performance of the US economy compared to its peers. Should we be proven right, then maybe the expected short-term decline in the Dollar is an opportunity for longer-term focus investors to start building some long positions.

Meanwhile, the Euro is seeing continued demand after the Fed meeting that opened the door for an easier monetary policy in the US. The shared currency has now reached the 1.13 level and from a technical perspective the bullish bias could last a bit longer. The next resistance lies at the 1.1350 area but today’s PMI reports from the Euro area will be key in extending the rally or putting the brakes on. Economists are looking for a slight improvement in the manufacturing and services sectors in the Eurozone but a round of potentially softer figures from Germany will not bode well for the Euro bulls. In any case, the short-term bias for the Single currency does point higher but given the ECB’s dovish guidance we need to remain cautious in the longer term.

Sterling was similarly bullish this week, having gained around 200 pips to reach the 1.27 area. In the UK political arena, the odds are in favor of Boris Johnson becoming the next British PM and the real question is whether this will be bullish or bearish for the Pound. Johnson have claimed that he plans to take the UK out of the European Union, one way or another, when the current deadline is reached. This is not the best scenario for Sterling given that the European side has signaled they’re not willing to renegotiate the deal in place so the odds of a no-deal Brexit remain elevated.

At the same time, the BoE did not change its guidance and still sees the need for raising interest rates when Brexit is resolved, but clearly this could only happen in case of a soft exit from the EU. As such, we remain cautious in regards to Sterling’s bullish case which is mostly supported by the Dollar’s expected weakness after the FOMC decision. The next resistance lies at the 1.28 area and even though the bullish bias in place could propel prices towards that level in the short term, we remain unsure on whether the British currency can indeed overtake it.

Gold has been making headlines over the past couple of day as its meteoric rise has driven prices to the $1,400 area. For the yellow metal, the combination of a weaker Dollar and lower US Treasury yields can only mean a bullish outlook and the rally may not be over yet. Tensions in the Gulf of Oman remain elevated while a trade deal between the US and China appears elusive at this point so Gold could see even more demand in the weeks ahead, which could drive prices towards the $1,460-80 area.

In the equities’ universe, yesterday was a day of gains around the globe with the US indices climbing around 1% on average and Europe closing in positive territory as well. The prospect of a lower rates’ regime in the US is a supportive catalyst but, as we mentioned yesterday, investors need to assess whether this comes on the back of a material declaration in domestic performance. We believe that this is the case and with futures pointing slightly lower this morning, market participants share our worries. In any case, we think that the bullish sentiment will prevail in the short term and equities will see more gains but we should also remain very guarded in regards to their medium-term outlook.

MARKET EVENTS TO WATCH

  • German Manufacturing/Services PMI - 11.30am
  • Eurozone Manufacturing/Services PMI - 12pm
  • US Manufacturing/Services PMI - 17.45pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research