A busy week full of key US-related reports kicks off with the Dollar in the ascendancy despite 10-year yields still hovering around the 2.3% mark. The US currency edged higher against its peers during the past 24 hours with the European majors giving up some of their last week's gains. Equities were largely positive yesterday, with the exception of the US and UK markets that were closed due to a holiday and futures point to the upside this morning. Gold struggled to overcome the $1,285 resistance and Oil moved towards $59.
A trifecta of important US reports is scheduled for release this week with the Consumer Confidence, Gross Domestic Product and PCE inflation figures expected to provide direction to the Dollar. The greenback ended last week on a low note, especially after the preliminary manufacturing and services PMI data for May missed their marks by a wide margin. Treasury yields declined as investors grew increasingly nervous about the continuous slowdown seen in the domestic economy. Nevertheless, as we've explained many times in our daily remarks, the Dollar remains well in demand due to the relative under-performance of its peers' economies.
However, this week's fresh figures will be key in assessing whether this US over-performance persists or further cracks are being witnessed. All three reports gauge the health of key parts of the economy: consumer demand, productivity and inflationary pressures. Economists are predicting a positive reading across all three data sets and, should this be the case, the Dollar will extend its current rally further. Dollar/Yen is trading around 109.50 and bullish US figures should send prices above 110 and en-route to the 110.60 highs.
Having said that, we need to remain mindful of the odds for one - or more - of these key reports printing in a bearish manner. In our opinion, out of the three set of figures the Gross Domestic Product figures is the most important risk for the Dollar and here's why: market participants have noticed the weakness seen in consumer spending over the past few weeks, as retail sales missed three times during the past five months, and the low inflation is a well-known issue for the US economy. Contrary to these, GDP has been a source of enthusiasm with the impressive 3.2% reading last time around spreading excitement among traders. As such, in the off chance the report comes out in a bearish manner, worries about lower US growth will re-emerge and the Dollar will suffer as the odds for interest rate cuts will greatly increase.
The Euro and the Pound are struggling to hold on to their gains seen at the end of last week with political uncertainty dampening the already sour economic outlook. Italy is once again becoming a problem for the Eurozone as the ruling coalition is facing a $4 billion fine from the EU for failing to reduce their budget deficit. Meanwhile, the Tory party in Britain is looking for May's replacement and the two front-runners for the job - Johnson and Raab - have already committed to take the UK out of the Union even without a deal. As such, the bias is pointing lower and, barring a bearish surprise in US data, we should see prices dropping towards 1.1150 and 1.26 respectively.
Gold is oscillating around the $1,285 area lacking any important catalyst to drive the price action towards any direction. The combination of a strong US Dollar and elevated geopolitical risks continue to persist but with investors already aware of the deteriorating relations with China and Iran, it's the Dollar's bias that will dictate what's next for the yellow metal. As discussed above, there's a host of key US data coming our way so depending on a bullish or bearish takeaway, Gold will either travel north to $1,295 or retreat towards $1,272-75. Oil seems to be bouncing higher after the steep decline on Thursday; the level to watch is the $60 area which poses as the first resistance for prices to overcome before a broader bullish trend develops.
Finally, equities in Europe started the week with small gains despite low volumes as the US and UK markets were closed. Futures on both sides of the Atlantic are pointing higher this morning but we need to be wary of the incoming US figures throughout of the week. A round of positive figures from the domestic economy should keep spirits up and equities will likely look to recover their recent losses but a potentially disappointing GDP report will bode badly for investors.
MARKET EVENTS TO WATCH
- US House Price Index - 5pm
- US Consumer Confidence Index - 6pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research