Monday, July 30, 2018

Three central bank meetings and a flurry of key events will keep investors busy this week

Tags
  • Yen
  • Euro
  • Pound
  • Stocks

MORNING BRIEFING

A very busy week lies ahead of us with 3 central bank meetings, the US Non-Farm Payrolls and a number of other key economic data releases all demanding our attention. July has been an intriguing month for currencies and equities but August will be equally interesting as central bank action and geopolitical developments will take turns in dictating price action and this week will provide us with an indication of what to expect, at least on the central bank front.

Starting with the Dollar, the US currency failed to impress on Friday as the eagerly awaited GDP report printed in line with expectations but with Dollar bulls hoping for something better the greenback didn't extend its rally. Looking ahead though, the Fed meeting on Wednesday and the NFPs on Friday will provide fresh stimulus to investors looking to gauge Dollar's performance during Q3. We can expect a continued bullish tone from the US central bank as the domestic market's performance remains robust and the Fed is on course for another rate hike in September. Similarly, the Non-Farm Payrolls on Friday should underpin the market's expectations for a positive Dollar bias in August; especially if the unemployment rate declines and wage growth prints strong. This could drive the Euro lower with a break below Friday's 1.1620 lows exposing the 1.1550 area.

So is this the time to buy Dollar/Yen as well? Not yet. The Bank of Japan's meeting tomorrow has the potential to turn the tables as there's rumors that the central bank might change their policy. Right now, the BoJ does everything they can to keep their 10-year yields near the 0% mark keeping the Yen relatively weak but this could change tomorrow and the effects of such a move would be huge. The Yen would rally versus its peers taking the Dollar/Yen below 110 so patience is advised until tomorrow's meeting. However, if the BoJ fails to deliver then a move above 111.50 points towards 112.

The Pound also demands our attention this week. The Bank of England will be the third central bank to meet this week and it's high time we found out whether they will pull the trigger and raise interest rates. There's quite of a debate on whether the BoE should tighten policy at this time and for good reason: the domestic market doesn't exactly scream over-performance with several key metrics printing softer in recent weeks.

However, with inflation running higher compared to BoE's 2% target the central bank might be forced to take action now rather than wait and this is our base scenario given that odds for this are at 91% this morning. Should this be the case, the Pound will likely overperform the Dollar and the Euro and look to climb above the 1.32 mark while pushing EUR/GBP to 0.88.

Finally, the Euro will also have a number of key reports over the course of the week ahead. The German and Eurozone inflation data and the German Unemployment and Retail Sales figures will keep traders busy during the next 2 days. However, after Draghi's measured optimism during last week's ECB meeting and with a flurry of US-related events on the docket, the Euro's price action will be mainly driven by Dollar's momentum. The Single currency looks somewhat weak and as mentioned above a move below recent lows could attract more selling interest.

Commodities took a turn to the downside towards the end of last week. Gold was able to partially recover after the US GDP data disappointed Dollar bulls but this morning prices are again under pressure. The re-test of the $1,218 lows will reveal whether the yellow metal could break lower towards the $1,210 area or whether we should look for a consolidation between $1,220 and $1,225. Oil dropped below $69 on Friday and the recent uptrend is now put to the test; if Oil manages to recover above this level then the upside is still an option, otherwise we should look for a move towards the $67.50 lows.

Equities ended the week in a mixed manner on Friday with the European markets closing above water while US equities didn't respond well to the US GDP figures as there was speculation for a more robust reading. Following suit, the Asian bourses are trading with a bearish bias this morning. However, with the European futures indicating a positive opening bell and the US futures pointing lower we should be in for a mixed start this week. Clearly, investors prefer to take a cautious approach given the numbers of key events and central bank meetings ahead so choppy price action will be the theme of the day.

MARKET EVENTS TO WATCH

  • German Consumer Price Index - 4pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Market Research

 
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