April's last few days will be a rather busy week for traders and investors alike with key US-related events scheduled to take place. The Dollar will remain front and center as market participants are eagerly expecting the release of the FOMC rate decision on Wednesday and the Non-Farm Payrolls report due on Friday. The greenback's European peers will also take their cue from the fresh US data after seeing some uptick on Friday on the back of the US GDP report. Equities gained at the end of last week, Gold rallied but Oil saw a pullback that drove prices to the $63 area.
The US GDP report was the most important piece of data last week and Dollar bulls were hoping for a robust reading that would continue supporting the greenback on its way higher. Indeed, the GDP report blew expectations out of the water, coming in at 3.2% vs. predictions for a 2.3% advance, but it was the fine print that force the Dollar to end the week on a low note. Inflation expectations retreated with the quarter-on-quarter Core PCE figures printing significantly softer and, after the initial bullish knee-jerk reaction, forced the Dollar lower.
So why did the markets react like this and what does it mean for the week ahead? Clearly, investors believe that the Fed is more focused on inflation rather than growth and with the inflation data looking weak they're pricing in a softer central bank policy ahead. The consensus seems to be that Jerome Powell's focus after the FOMC rate decision on Wednesday will be on low inflation and anemic global growth, which will increase the odds of a potential rate cut by the Fed this year - or at least, tilt market participants' expectations in favor of such a move.
Based on that premise, the Dollar may see a pullback after a strong performance over the past few weeks. Dollar/Yen has already moved below 112 and further Dollar weakness may see prices dropping below 111 over the course of the week. The Euro and the Pound are a different story though due to domestic under-performance and political uncertainties; both currencies saw a correction higher on the back of the US data but their medium-term outlooks still point lower so even though we may see a short-term bullish bias, we prefer to look for potential short entries around 1.12 and 1.29 respectively. Especially for the Euro, Italy's GDP report tomorrow may confirm that the country is in recessionary territory, casting further doubts on Eurozone's growth.
Gold benefited from Dollar's lackluster performance on Friday and extended its recent move towards higher levels. Prices have already crossed above the $1,280 barrier and hit out initial $1,288 target on Friday; given the bearish expectations ahead of the Fed meeting mid-week we may see a further extension higher with the $1,295 area coming into focus. Oil on the other hand retreated on Friday and is now testing the key $63 support: a bounce higher will see prices moving towards $64 and $65, otherwise a break below the $63 level clears the path for $62 and $60.50.
Finally, equities were able to end the week on a high note, supported by the positive US GDP figures. For stock traders, it seems that the important catalysts are pointing higher: the US sees strong domestic growth, low inflation keeps the Fed at bay and could potentially trigger a rate cut so it seems that equities have nowhere to go but higher - at least in the short term. Truth be told, we think that investors should employ a more cautious approach, with the US markets near record highs and 10-year yields dropping below 2.5%, suggesting that a selloff may be around the corner. In any case, market participants don't seem to share our skepticism and equity futures in Europe and the US are pointing towards a positive opening bell.
MARKET EVENTS TO WATCH
- Euro-Zone Consumer Confidence - 1pm
- US PCE Core - 4.30pm
- US PCE Deflator - 4.30pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research