Currency and equity markets are on a full risk-on mode as better than expected figures and trade-related optimism grips investors' sentiment pushing most instruments to fresh highs. The European majors moved higher as the Dollar continued to under-perform almost across the board with the exception of the Japanese Yen. Equities hit record highs as market participants seem to rejoice on the less severe trade tariffs imposed by the US and China's timid response.
The Dollar proceeded lower against all of its peers - except the Yen - yesterday as investors' sentiment seems to have improved and 10-year yields came off their highs. Furthermore, there is also some speculation that the Fed may avoid raising rates for a fourth time this year, after next week's guaranteed increase, which further dampens the greenback's momentum. However, with trade tensions being the point of focus and traders deciding that Trump's tariffs could have been worse the Dollar is bound to lag behind the rest of the majors.
The Euro is at the forefront today after almost hitting 1.18 during yesterday's session. The shared currency is enjoying support from multiple fronts: better than expected Eurozone data, Draghi's recent bullish remarks and Brexit-related optimism, on top of greenback's under-performance. Today though traders' attention will be on the release of the Eurozone PMIs and depending on how figures print we may see further gains or a correction to the downside. If the PMIs indicate strong domestic market performance the shared currency will rally above 1.18 en route to 1.1850 while a round of disappointing numbers will force the Euro to reverse towards the 1.17 area.
The Pound broke above 1.32 to come close to the 1.33 figure as retail sales surprised to the upside, supported by higher wage growth. With inflation printing higher than expected and consumer spending also stronger, Sterling defies the less than exciting news coming from Salzburg. Nevertheless, the EU leaders continue to talk with Theresa May and consensus is that a solution will be reached at some point. Should they come to an agreement the Pound will explode higher as speculators are still net-short on the UK currency and they will look to cover their positions. Our target in this case is found around the 1.3450 area.
Commodities followed different paths over the past 24 hours with Gold extending gains and Oil correcting lower. The yellow metal hit $1,210 overnight taking advantage of Dollar's weakness and the question now becomes whether it can finally break above this resistance. Even though Gold has been trading sideways for some time now and it may look hard for prices to break out of this pattern, further Dollar weakness will present an opportunity for a breakout, which if it happens will expose the $1,230 area. Oil on the other hand pulled back after hitting $71.50 rejecting this resistance for the third time this month. Nevertheless if it manages to remain above the $69.50 support level, then another leg higher is still likely which will eventually penetrate that barrier.
Equities hit record highs in the US yesterday while the European markets also trended upwards as market participants seem to assess that the amount of tariffs about to be imposed by Donald Trump on China could have been worse. Whether this assessment justifies the improved risk appetite or whether it disregards the main issue, that the US President is escalating the dispute, remains to be seen. In any case, futures on both sides of the Atlantic are indicating a strong opening bell with the European markets expected to open half a percent higher while the US bourses are also trending above water.
MARKET EVENTS TO WATCH
- Eurozone Manufacturing PMI - 12pm
- Eurozone Services PMI - 12pm
- US Manufacturing PMI - 5.45pm
- US Services PMI - 5.45pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research