A quiet start for the week yesterday with the Dollar extending its gains versus the European majors while also pushing safe haven currencies lower. Looking ahead, market participants will shift their attention to the United Kingdom today as the Tories will announce their new leader and British Prime Minister, with Boris Johnson likely to get the nod. Equities picked up pace during the later trading hours and closed above water across the globe, Gold saw a deeper decline while Oil was able to stay above $56.
The US Dollar started the week strong as investors looked to dial back their ultra-bearish bets on the currency after the Fed hinted via a leak to the press that they’re looking to ease policy by 25bps at most when they meet next week. Dollar/Yen is moving back above the 108 level on the back of the improved outlook for the greenback while a similar momentum is seen against the Swiss Franc. As we discussed yesterday, the focus in terms of the Dollar’s medium-term outlook now falls on the incoming data from the States: today’s New Homes Sales figures and tomorrow’s Existing Home Sales and manufacturing/services PMIs will set the tone ahead of the GDP release a day after. A positive set of figures should keep the Dollar well supported as it would hint on the Fed staying patient after this month’s easing but a miss, especially for the GDP data, would put the currency under pressure again.
The Euro, on the other hand, retains its bearish bias ahead of the ECB monetary policy decision later this week, as market participants are anticipating more dovishness from the European policymakers. At this point, it seems less likely that the ECB will go ahead with a 10bps cut as Bloomberg puts the odds of a move on Thursday at 35% compared to 45% just a day ago. Nevertheless, even if Draghi doesn’t pull the trigger now he should at least set the stage for a cut very soon in an attempt to reinvigorate growth in the Euro area. The shared currency lost the 1.12 handle overnight and, even if Draghi stays put for now, the path of least resistance continues to point lower.
Meanwhile, after weeks of political drama surrounding British politics, the day is finally here when the Conservative party will announce their next leader. Boris Johnson is tipped to win the race versus Jeremy Hunt and this outcome doesn’t bode very well for the Pound that dropped below 1.25 yesterday. Johnson has pledged to leave the European Union by October 31st at “all costs“, which raises the likelihood of a no-deal Brexit scenario. As a result. Finance Chief Philip Hammond and Justice Secretary David Guake announced their intention to resign immediately after the result confirms Boris Johnson as the next PM. Sterling’s outlook hinges on the way Boris will handle the exit talks going forward and all bets are off at this time.
Gold extended its retreat during yesterday’s session and prices have now dropped below the $1,420 mark as investors were looking to exit their Dollar shorts. However, the broader outlook for the yellow metal remains positive against a host of fundamental catalysts so it will be very interesting to see how Gold will react when it tests the $1,410-15 area. Fresh demand may re-emerge around this level given the expectations for inflation to start picking up pace soon amid an upcoming central bank easing regime.
Finally, equities were able to start the week in a positive fashion with both Europe and the US closing above water yesterday. Despite the now-reduced likelihood of the Fed easing policy aggressively, stock traders seem to retain their bullish bias. It remains unclear whether the upbeat tone is supported by rumors that the US and China will resume trade talks next week but in any case, futures are pointing higher this morning. The earnings’ season remains in full swing and tech giants Snapchat, Facebook, Alphabet and Amazon are due to release their quarterly results over the next couple of days.
MARKET EVENTS TO WATCH
- Euro-Zone Consumer Confidence - 6pm
- US Existing Home Sales - 6pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research