Volatility will remain elevated throughout the week with politics and fresh data keeping traders on their toes. The major currencies will take their cue from the US retail sales figures' release, the degree of progress in the Brexit negotiations and equities' reaction to the strong losses seen last week. The Pound already started the week in the red as rumors that talks in Brussels have come to a stop again dampen sentiment while Oil is on the offensive after Saudi Arabia responded to threats of US sanctions.
The Dollar picked up pace once again at the end of last week as market participants seem to realize that even though we've seen a slight deterioration in domestic data, the US growth remains strong. Further to this, today's retail sales figures will be closely monitored for obvious reasons: a robust reading - as expected - will allow investors to refocus on the strong US growth story and the greenback should proceed higher again while a miss will trigger the opposite effect as uncertainty over the US' performance will intensify. Later in the week, the FOMC meeting's minutes will naturally echo the Fed's bullish stance so our attention should rather be focused on the fresh data as the central bank's view is already priced in. The Dollar/Yen treads water just above the 112 mark this morning and the retail sales data release while either push prices towards 113 again or force a deeper correction towards 111.50.
The Pound started the week in a bearish tone dropping below 1.31 when Asia opened for trading; news from Brussels that the talks have been put on ice once again and that the Irish border still remains the thorny issue forced investors to reduce their exposure on the UK currency. Earlier in the month, Sterling enjoyed broad gains as speculation for a deal prompted investors to pile on their longs but with little progress seen nervousness seems to be triggering some profit-taking. In any case, the Pound's outlook will depend on whether any progress will be seen before or during the EU summit on Thursday while the inflation and employment figures will take a backseat. In terms of price action, a disappointing development will drive prices towards the 1.3050 area and a break below that will expose the 1.2950 level, while meaningful progress will attract more buying interest and propel Sterling towards 1.33.
Commodities seem to be trading with a bullish bias this morning with Gold consolidating its gains and Oil looking to build up momentum. The yellow metal took advantage of Dollar's weakness last week and managed to break outside its former sideways range. Given that we've seen a similar break - to the downside that time - last month which was quickly negated we hold a cautious view over Gold's outlook: a strong US retail sales report today will put pressure on prices again and the $1,214 support will be put to the test. As such, if Gold manages to hold above this key support then more gains will be likely, otherwise a return to the sideways, directionless price action might be the next step. Oil is trying to come off its $71 lows but we will need a break above the $72.50 resistance for more gains to come; should this happen then $75 will be the next target.
Equities ended last week in a mixed manner with Europe slightly in the red while the US markets were able to close in positive territory. This morning however, Asia is showing strong losses while futures on both sides of the pond are trending to the downside. Clearly investors are still concerned about the prospects of US domestic growth against a backdrop of trade tensions combined with a hawkish Fed that looks to keep raising rates. A positive US consumer report may help alleviate some of the nervousness among stock investors but we will need a string of encouraging figures to alter the bearish sentiment at this point.
MARKET EVENTS TO WATCH
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research