The European majors have started the day in the red while the Dollar pushes on having found fresh support from the recovering equities' markets. Both the Euro and the Pound are seeing losses early this morning pressured by recent data and lack of progress in the key political issues, namely the Brexit. At the same time, the greenback is striking a positive tone weighing down on the Yen and Gold. Oil is again trying to break above $72 and with traders worried about supply we may finally see a fresh leg to the upside.
Starting with the Euro, we said yesterday that we may witness some weakness during Tuesday's session but we had high hopes for today's data. The Eurozone inflation report is pending for release and given that Mario Draghi has recently made a number of references to underlying inflation picking up pace we're eager to see evidence of that in today's figures. The shared currency is trading at 1.1550 this morning testing this short-term support level and if the data prints in a positive manner, as expected, then we should see the Euro pushing towards 1.16 but that's the key barrier that will put our thesis to the test. If the Euro manages to finally break above its recent highs then 1.1650 and 1.17 are the next levels to watch; otherwise the Dollar may take over control of the pair again and drive it towards 1.15.
The Pound saw some initial gains yesterday but the US session was not as positive for the currency as prices retreated below 1.32 again. UK Prime Minister Theresa May is heading to Brussels today with no breakthrough related to the Brexit talks in her bags and will instead ask the EU leaders to keep working towards a solution. What's interesting however is that even though we've seen no progress, the Pound is trading with a positive bias since the beginning of the week. There's only one way to read this: everyone who's bearish regarding a “no deal” Brexit is already short Sterling and the only ones dipping their toes in the market are the short-term speculators hoping for a positive resolution.
Earlier in the day the release of the UK inflation data is also a short-term risk for the UK currency as analysts are expecting a slowdown in prices' pressures during last month. With inflation coming off its highs there's less pressure on the Bank of England to raise interest rates again, something they'd like to delay for as much as possible given the Brexit-related uncertainty and the financial markets' volatility amid trade tensions. As such, a softer reading today may force the Pound to retreat lower with 1.3150 the near-term support and 1.31 the next area of focus.
The Dollar is gaining this morning as global equities are recovering and the US-focused risk-off tone subsides. Strong earnings' reports from the US are also helping improve investors' sentiment, portraying solid domestic growth and helping the greenback push higher. Today's FOMC minutes release will be of limited use as the minutes will echo the Fed's hawkish tone but the September meeting took place before the recent volatility seen in the markets. In any case, should the Dollar continue pushing higher it will allow Dollar/Yen to break above the 112.50 barrier and trend towards 113.
Commodities are still consolidating around the same levels we've seen since the start of the week. Gold is coming under some pressure from the recovering Dollar while the improvement of investors' sentiment reduces any risk-off demand. The retest of the $1,215 support level will decide the medium-term outlook for Gold and as long as prices remain above it we may see a further extension higher eventually. Oil is on the rise again and another attempt to break above $72 is under-way; we're currently bullish over Oil's outlook and we believe that as soon as prices clear the $72 - 72.50 barrier we will see another rally towards $75.
Equity traders have a few reasons to rejoice hence the positive tone seen in the markets this morning. Earnings are printing in a positive fashion, underpinning the case of solid US growth while the lower inflation and retail sales data is preventing the Fed from growing ultra-hawkish, leaving room for a continued recovery. Futures on both sides of the Atlantic are pushing to the upside so we should be in for another bullish opening bell this week. Today online giant e-Bay will be releasing its figures and it will be interesting to see how consumer spending - or lack thereof - will affect its quarterly data.
MARKET EVENTS TO WATCH
- UK Consumer Price Index - 12.30pm
- Euro-Zone Consumer Price Index - 1pm
- FOMC Meeting Minutes - 10pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research