Geopolitics rather than economics continue to drive price action in the currency and equities markets during a light week with almost no fresh data. Yesterday's session was marked by a reversal of sentiment that initially saw the Dollar gaining but during the latter part of the day the greenback moved back to the downside. Equities were mostly in the red with the exception of the FTSE 100 but this morning a positive opening bell is expected.
China's response to the fresh round of US-planned sanctions with levies of their own stemmed the improvement in risk sentiment we saw earlier in the week and pushed the Dollar to the upside. However, with the 10-year Treasury yields proceeding lower during the US session we might see further weakness in the Dollar today. It's important to note that the Dollar Index is about to test the 95.00 support for a fourth time this week; if it breaks lower then we may see a continuation of the rallies in the Euro, the Australian Dollar and the Yen while Gold is also a candidate for a break higher.
Looking at the Euro this morning, the shared currency is attempting to break above the 1.16 barrier and this will be an important test regarding its short-term outlook. Technicals suggest a reversal lower as a double top has formed and the momentum studies indicate a slowdown in demand for the Euro but if the Dollar remains in the defensive we may actually see an extension higher, with the 1.1660 area appearing as the next level to focus on. On the flip side, a rejection of the 1.16 resistance will drive prices towards yesterday's lows again.
The Pound was not able to capitalize on Dollar's recent weakness as worries about a disorderly exit from the European Union continue to make headlines. There's a story in the news that suggests that PM May is actually planning for a cabinet meeting to discuss the potential for a no-deal Brexit which puts the Pound under further pressure. Having said that, if the greenback does retreat lower today as discussed above, we may see a move towards 1.2920 for Cable but given the bearish fundamental bias any gains will likely be short-lived. The technical outlook suggests that the current leg to the downside may extend all the way to the 1.28 figure.
Commodities are at the top of our watchlist this morning with Oil dropping significantly yesterday and Gold poised for a breakout. Starting with the yellow metal, prices have been probing the 1,216 resistance over the past 3 days and a move above it will drive Gold near the $1,220 area. This is a key short-term resistance level and a potential break higher exposes the $1,225 and $1,235 levels. Oil declined yesterday after news that China will retaliate against the newly-proposed US sanctions but the broader outlook remains positive; if prices climb back above the $67.50 mark we should see a continuation of the previous sideways price action between $67 and $70.
Equities in Asia are trading above water this morning even though most markets ended the day in the red yesterday. Nevertheless, the European and US futures are pointing towards a mostly positive opening bell at this time. The recent gains in the US markets are helping their European counterparties claw back the losses seen at the start of the month so we should see a further continuation of the bullish price action during today's session.
MARKET EVENTS TO WATCH
- ECB Publishes Economic Bulletin - 12pm
- US Initial Jobless Claims - 4.30pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Market Research