The Dollar plunges across the board ahead of the release of the FOMC minutes from January as investors speculate that the report will underpin the recent dovish tilt among the Fed policymakers. The Euro, the Pound and the commodity dollars all gained versus the greenback, even though the ZEW Survey printed in negative territory as expected and the UK labor figures didn't impress. Equities were mixed, with the European markets mostly below water while the US were able to score a small advance; equity futures are flat this morning. Gold rallied further on the back of Dollar's weakness reaching $1,345 overnight.
The release of the minutes from the FOMC January meeting will clearly be the major focus of the day ahead. Investors have been selling the Dollar since yesterday in expectation of further evidence of a dovish tilt in Fed's policy in regards to interest rates. It's key to remember here that the Fed changed its tune in December, citing elevated risks in the face of rising geopolitical uncertainties and suggested that a patient approach is more appropriate going forward. This had led the Euro to rise quickly and the Dollar/Yen to drive lower in a hurry.
A soft round of European figures and signs of progress in the Sino-US trade talks have allowed the Dollar to recover against its two counterparties ever since. But what about the intrinsic outlook of the US currency itself? What kind of data have seen since December that would help us assess what's next? Unfortunately for the Dollar bulls, the two key metrics that the Fed monitors in order to assess the health of the economy have printed in a negative manner: inflation is stalling and consumer spending is deteriorating rapidly. As such, there's little hope for the greenback to get any kind of support from today's release. We expect the rallies seen over the past 24 hours to extend: the Euro looks poised to hit 1.14 and Dollar/Yen will likely test the 110 support.
Sterling was among the biggest winners of the day yesterday climbing more than 1% on the back of Dollar's bearish tone and hopes ahead of Theresa May's meeting with Juncker later today. Cable traded above 1.30 to reach a 1.3075 high overnight but these gains will be now put to the test. The British PM is said to be considering today's meeting a key part of her plan to secure legally binding changes to the Brexit agreement in place but the mood on the other side of the Channel is not encouraging. The EU side seems in no hurry to offer concessions and should the meeting today prove fruitless then the Pound will correct and look to test the 1.30 mark once more.
Gold reached our short-term target area of $1,340-50 mentioned in our note yesterday but it wasn't a breakdown in the US-China trade talks that triggered the rally. Instead, investors embarked on a Dollar-selling spree ahead of the FOMC minutes' release. Having said that, we still see two scenarios for the yellow metal: a deterioration in trade relations which will send prices to $1,360-65 or signs of the US and China getting closer to a deal, driving Gold towards $1,320 again. Oil has been consolidating around $56 for the past 48 hours which allows room for more gains, $58 remains our target as long as prices hold above $54.50.
Equities were mixed yesterday but the Asian markets have kicked off the day in a positive mood. Clearly, the FOMC minutes' release later today is stoking investors' bullish bias: if the Fed reaffirms the need for a steady interest rates' policy in the foreseeable future then equities will benefit but we also need to be mindful of the broader geopolitical backdrop. With the US and China trade talks still ongoing traders will look for concrete evidence of progress before recommitting to overweight longs. Futures on both sides of the pond point marginally higher so we should be in for a muted opening session.
MARKET EVENTS TO WATCH
- US MBA Mortgage Applications - 4pm
- FOMC Meeting Minutes - 11pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research