Monday, March 4, 2019

US-China closer to a trade deal but the Euro may lag behind this week

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

MORNING BRIEFING

Currencies open higher for the week ahead and equity futures are pointing to the upside before the London opening bell after US and China indicated they are one step away from a trade deal. According to several sources, most if not all US tariffs on China are likely to be lifted as part of the impending agreement while the Asian nation will lift their levies on US products. High beta currencies opened higher in Asia and are currently closing the gap but the path of least resistance points higher. Gold drops below $1,300 as risk aversion subsides further and Oil stalled ahead of $58 for yet another time.

The Dollar started the week on a positive note having gained on Friday too, supported by the higher Treasury yields now trading above 2.75%. President Trump took another swing at Fed Chairman Powell on Saturday calling the Dollar “too strong” but the US currency doesn't seem to mind that at all. This week, the direction for the greenback will come from fresh data, with the ISM Non-Manufacturing figures pending for tomorrow expected to print in a robust manner, ahead of the all-important Non-Farm Payrolls report on Friday. Dollar/Yen is already trading at 112 and a further extension towards the 112.50 mark should be the next step.

Furthermore, geopolitics will also play a role in how markets trade in the days ahead and, with the progress over US-China trade talks being the major headline, we may see some of the pro-risk currencies over-perform, especially those having a strong correlation to the Chinese economy, like the commodity dollars. Albeit, the Euro may not be among the winners of the week. The Single currency had its chance last Friday when the manufacturing PMIs from Italy and France beat expectations but a downbeat inflation reading a few hours later kept the Euro in check. This week, the ECB meeting on Thursday will likely be another opportunity for Draghi to call for patience and downplay any rate hike expectations for this year. As such, the Euro looks vulnerable and a retreat towards 1.13 appears more likely.

The Pound looks bearish on the technical charts but we know that it's politics that drive Sterling these days. Even though the UK currency has seen a correction from the 1.3350 highs over the previous week, recent news suggests that several members of PM May's “internal opposition” are prepared to agree terms and support her efforts to deliver Brexit. As such, and should the news be confirmed one way or another, the Pound may see a swift reversal higher over the next few days. Technically, Cable is still trading above the key 1.32 support and another leg higher could see prices shooting towards 1.3350 again and a break higher will clear the path towards 1.35.

Gold is seeing a deeper correction as the trade talks between the US and China are going well and investors see fewer reasons to look for shelter. Prices have now fallen to the $1,295 area, penetrating several support levels at once, and if we don't see a bounce from here then an extension lower exposes the $1,278-80 mark. Oil stalled just a few cents away from our $58 target and withdrew to trade as low as $56 but the fundamentals are still positive; recent output reductions from Russia and US drilling levels at 9-month lows suggest that tighter supply dynamics will push prices higher once again, especially if the $55 level holds.

Equities are seen opening higher today on the back of the rumors regarding an impending US-China trade deal and a lift of tariffs from both sides. Friday saw a positive close in Europe and the US so investors will look to position themselves for more gains as geopolitical risks ease and monetary policy conditions remain unchanged. Futures in Europe point towards half a percent gains at the opening of London while the US bourses are expected to kick off action around 0.35% in the green.


MARKET EVENTS TO WATCH

  • Euro-Zone Sentix Investor Confidence - 1.30pm
  • UK Construction PMI - 1.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research