The Dollar strikes a positive tone as equity markets seem to stabilize after a few days of elevated volatility. The US currency trends to the upside while 10-year Treasuries push higher to support the gains even though the retail sales data missed yesterday. The Pound comes front and center as fresh data is pending for release amid nervousness regarding the Brexit negotiations. Gold remains in consolidation mode and Oil tries to break into positive territory once again.
Starting with the Euro, the Single currency came off its highs yesterday after testing the 1.16 barrier for a second time. It's important to note that even though the retail sales report from the US missed its mark, the Euro was unable to capitalize on this and break higher. There's a combination of reasons that may explain this: first, Italy's budget deficit troubles still remain on the forefront and the continued political uncertainty in France also poses a risk. Second, the ZEW Survey scheduled for release this morning will likely reflect this uncertainty and the report is expected to print lower.
As such, the Euro is facing some trouble breaking higher and today's ZEW data might make it even harder but this may not last long: the Eurozone inflation report is pending for release tomorrow and if figures print higher as expected they will underpin Mario Draghi's references to inflation picking up and will increase the odds of the ECB hiking rates sooner than currently thought. Should this be the case, then we may see the Euro trending towards the 1.1650 to 1.17 area over the next 48 hours.
Regarding the Pound, after the initial sell-off seen during the Asian opening yesterday the UK currency managed to close the gap and is currently trading where it ended last week. Clearly, Brexit is the key driver here and the latest rumors suggest that we shouldn't expect any significant progress during this week's EU leaders' summit. Given that and barring any outstanding surprises in the labor market data scheduled for release today, the Pound will remain capped below 1.3250. As long as there's no progress in the Brexit talks and time goes by, the path of least resistance for Sterling lies to the downside and a revisit of the 1.3050 lows appears more likely.
Finally, the Dollar is posting early gains after yesterday's retail sales data missed. This may sound counter-intuitive but the US currency's recovery is mostly fueled by the improved sentiment in the equity markets. Whether these gains will last is the key question this morning: with most US data now behind us the greenback will take its cue from equities while the FOMC minutes' release will also be a positive catalyst given that they should indicate a steady, hawkish tone coming from the Fed. Dollar/Yen seems to have carved a short-term low and is attempting to push higher this morning, the near-term resistance is found around the 112.50 area and a broader recovery will need a clear break above this level.
Gold seems to be consolidating after its recent break to the upside and as time passes the odds of a retreat below $1,215 again are diminishing. However, we need to note that there's a clear technical divergence developing as prices are posting new highs while momentum is slowing down; this suggests that a correction may be imminent and a retest of the $1,215 support will be key. If Gold holds above this level then more gains can be expected in the medium term. Oil moved higher but failed to overcome the $72 barrier. As we mentioned yesterday, we need a clear break of the $72.50 resistance for Oil to enter bullish territory again and until this happens we will hold a cautious outlook.
Equities in Asia are trading with a mixed bias this morning after a day that saw most of the European markets closing above water. Futures in Europe and the US are trending higher this morning and investors may be shifting their attention away from the recent sell off and hoping that the US earnings' season will provide fresh stimulus to equities. Netflix and Goldman Sachs will be releasing their results today and analysts are expecting a solid round of figures that will kick off the David Solomon era on a positive footing.
MARKET EVENTS TO WATCH
- UK Unemployment Rate - 12.30pm
- German ZEW Survey - 1pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research