Wednesday, January 23, 2019

Will the Dollar go on the defensive when the US government reopens?

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

KEY TALKING POINTS

A mixed performance for the currency and equity markets yesterday with the Dollar pulling lower on average while the major stock indices were mostly in the red. Global growth concerns on the back of IMF's downgraded forecasts and a rumor that the US-China talks were cancelled kept investors on the sidelines. On the other hand though, there seems to be light at the end of the tunnel in regards to the US government shutdown as the House is expected to hold a vote on Thursday that will extend funding until February 8. Gold pushed higher to trade to $1,285 and Oil rebounded to $53.

The Pound was among the winners of the day on the back of the UK employment figures. The report indicated that the labor market is still performing well, regardless of the ongoing Brexit negotiations. The unemployment rate printed lower while wage growth exceeded expectations. Sterling climbed to 1.2950 and even though Theresa May's “Plan B” didn't have anything new to bring to the table, investors are pricing in a positive outcome to the saga.

A no-deal exit seems to be less likely as time goes by and there seems to be mounting support for a second referendum, which is considered a positive step as analysts expect the Remain vote to prevail this time. In any case, the Pound's short-term outlook is tied to fresh news and headlines from this front and an extension of the recent gains towards 1.30 is our central scenario. In the off chance of a sudden change in sentiment though, the immediate support lies at the 1.2850 area.

Dollar/Yen moved lower yesterday to test the 109 level but overnight a fresh surge higher took prices 70 pips higher. Nevertheless, the momentum seems to be shifting lower for the currency pair and last week's highs at 109.90 look like a short-term peak. We can't preclude another run towards this level before the Dollar turns lower but we don't expect a strong continuation of the previous bullish trend. Fresh data from the US should start coming in as soon as the US shutdown ends and expectations are set for a bearish set of figures that would put the Dollar on the defensive. At the same time, softer US data should also drive US equities lower, which we expect to further contribute to Yen's strength. Our target for Dollar/Yen lies around the 108 area.

Gold bounced higher yesterday as expected and rallied to the $1,285 level. The growth warning from the IMF and weaker data from China are contributing to increased safe haven demand but we believe Gold needs more stimulus to really shine again. This would come from a fresh round of bearish US data that would put pressure on the Dollar and in turn lift the yellow metal. The interim resistance lies at the $1,288 level and as soon as prices overcome it we should be in for another test of the $1,295 level.

Oil fell all the way to $52 over the past 24 hours but demand emerged again and prices are now trading just above the $53 mark. Friday's discussion around Oil in the WEF in Davos is expected to provide further lift to prices which should look to retest the $54 area, with a view to hit $58 after a successful break above this.

Global stocks fell yesterday with mild losses in Europe and stronger declines in the US. The Asian markets are trading slightly below water this morning but the futures' market looks divided. The European bourses are expected to open in negative territory while the US markets are pointing slightly higher. In any case, the prevailing theme among equity investors is caution in the face of repeated lower growth warnings amid extended trade tensions. As such, our short-term bias for equities is currently cautious and more negativity could be expected.

MARKET EVENTS TO WATCH

  • US Mortgage Applications – 4pm
  • Euro-Zone Consumer Confidence - 7pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research

 
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