All eyes will be on the Euro today in light of the Eurozone’s industrial production figures, pending for release during the earlier part of the day. The Single currency had enjoyed strong gains on the back of the Dollar’s respite recently but this advance could come under threat today. Meanwhile, the Dollar pushed higher versus the Pound and the commodity dollars but eased off against the Japanese Yen as investors are eyeing tomorrow’s retail sales report. Gold consolidated above $1,330 and equities ended the day in red.
The Euro came off its highs yesterday after a failed attempt to break above last week’s 1.1350 top. Despite a soft US inflation reading, that would normally have weakened the Dollar, the shared currency was not able to capitalize on the greenback’s doubtful bias and instead pulled back towards 1.13. Today though the focus will be on the industrial production data from the Euro area and economists are expecting a weak printing. A bearish set of figures becomes even more likely when we take into account the sharp drop seen in Germany’s industrial production in recent weeks. With prices hovering just below the 1.13 mark this morning, a confirmation that the industrial sector continues to see negative growth will send the Euro towards the 1.1250 and potentially 1.1220 areas.
Meanwhile, the Dollar continues to perform in a mixed manner with gains against the higher beta currencies like the Euro, the Pound and the antipodeans but fresh weakness versus the safe havens like the Yen. This is a typical risk-off environment and don’t be confused because equities are not falling sharply, Gold is not rallying anymore and the Yen hasn’t advanced beyond the 108 mark. We have to keep in mind three things here: 1) the risk-averse Yen and Gold have recently seen quite significant gains and can’t go on rallying forever, 2) equities remain broadly supported by the speculation that the Fed will cut rates next month and 3) there’s still the US retail sales report pending for release this week.
That being said, the significance of the consumer spending figures from the States tomorrow can’t be overstated. Market participants may be keeping the US currency broadly bid ahead of the report, given expectations for a robust reading, but we need to be very aware of the potential risk here. We remember that retail sales have missed their mark 3 times over the past 5 months and despite economists’ expectations for a sharp rebound tomorrow, the risk for the report lies to the downside.
The labor market is flashing signs of weakness, as seen in recent reports and confirmed by last week’s NFP figures, and this could have taken a knock on effect on consumer demand. Furthermore, with consensus calling for a 0.7% month-on-month advance, a still positive but weaker reading of around 0.2-0.3% could be interpreted as a sign of weakness in consumer spending and the Dollar will not like this. Dollar/Yen is trading above the 108 mark but in case of another miss in the US data, prices could quickly fall towards the 107.50 area.
Elsewhere, Gold is consolidating between the $1,330 and $1,340 levels waiting for a fresh catalyst to dictate the direction in the short term. In our opinion, barring any sudden surprises or tweets from the US President on China or who know what, traders will likely wait to see how the US retail sales report will print and take their cue from there. A positive set of figures will help the Dollar advance further and the yellow metal could retreat towards the $1,320 area; otherwise, a nasty miss will propel prices to $1,350 and possibly $10 beyond that.
On the equities’ side, the European and US markets ended the day in the red yesterday with investors wondering why Donald Trump admitted publicly to be delaying the progress in the trade talks. Whether this was intended as a show of force from the US President’s side remains unclear but what it certainly did is cast doubt on whether any meaningful progress can be seen ahead of the G-20 meeting. Futures do point slightly lower this morning but with the “Fed put” effect underpinning investors’ trading rationale we see little reason for the slightly bearish mood to turn into anything more serious or long lasting.
MARKET EVENTS TO WATCH
- Eurozone Industrial Production - 1pm
- US Initial Jobless Claims - 4.30pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research