Equities gained yesterday, perhaps on heightened expectations over monetary easing by the ECB and the Fed, as well as a dovish turn by the BoE. The nomination of Christine Lagarde as the ECB chief, the miss in US data, as well as the disappointing UK PMIs may have been the fuel behind the increasing stimulus bets. We also had a Riksbank policy meeting, with the world’s oldest central bank keeping its interest rate and forward guidance unchanged.
The dollar traded lower against the majority of the other G10 currencies on Wednesday and during the Asian morning Thursday. It underperformed against NOK, AUD, NZD, SEK and CAD in that order, while it gained somewhat against CHF, JPY and GBP. The greenback was found virtually unchanged against EUR.
The weakening of the safe havens and the strengthening of the commodity-linked currencies suggest that markets switched to a risk-on trading activity. Indeed, major EU and US indices were a sea of green yesterday, with all three major US indices finishing at record closing highs, though Asian bourses today were mixed. Japan’s Nikkei 225 closed 0.30% up, while China’s Shanghai Composite slid 0.33%.
Yesterday, we saw Asian indices closing negative and we noted that investors chose to stop cheering the outcome of the Trump-Xi meeting early as it is far from suggesting that the US and China have bridged their differences. Someone could say that this was not the case, as sentiment turned positive during the EU and US session. However, we believe that the catalyst behind yesterday’s boost in equities was not hopes over a potential US-China deal soon, rather than heightened expectations over monetary easing by the ECB and the Fed, as well as a dovish turn by the BoE. Our view is supported by the fact that the pound, the euro and the dollar were the weakest currencies just behind the safe havens franc and yen, as well as by the slide in government bond yields. If it was hopes over a US-China accord, we believe that the dollar would have strengthened as it did on Monday, just after the outcome of the meeting between Trump and Xi, due to the logic that a potential trade deal could imply less need for aggressive easing by the Fed.
Getting the ball rolling with the ECB, on Tuesday, IMF Director Christine Lagarde was nominated to succeed Mario Draghi at the helm of the central bank when his term ends on October 31st. It appears that market participants believe that as a crisis fighter, she may be on the same page with Draghi, favoring further stimulus in order to support the Euro-area economy. That’s why they may have chosen to push EU equities up and the euro down, especially as her appointment means that Jens Weidman, who is considered a hawk and was thought to be one of the strongest candidates for the post, is now missed out. According to Eurozone money markets investors are more-than-fully pricing in a 10bps rate cut in September. Actually, they currently factor in 12bps.
Passing the ball to the pound and the BoE, yesterday, the UK services PMI for June slid to 50.2 from 51.0, missing expectations of an unchanged print. Following the disappointment in the manufacturing and construction indices for the month, as well as the cautious remarks by Governor Carney on Tuesday, the slide in the more-important services index may have added to speculation that the BoE may soon decide to abandon plans for higher rates. According to the UK OIS (Overnight Index Swaps), market participants even assign approximately a 50% chance for interest rates to be lowered by year end.
With the UK’s next Prime Minister yet to be decided, and both of the remaining candidates signaling that they could go for a no-deal divorce at the end of October if no other solution is found on time, investors are finding it hard to believe that a BoE hike could materialize. Even if the UK departs in an orderly manner on October 31st, up until then, the uncertainty surrounding the process may weigh further on the domestic economy and thereby, force BoE policymakers to drop their hike bias well ahead of the exit.
Now, with regards to the Fed, a bunch of soft US data yesterday may have prompted investors to add to their already elevated bets with regards to lower rates in the US. The ADP employment report revealed less job gains than expected for the month of June, raising speculation that tomorrow’s NFP number may also miss its estimates. The trade balance and factory orders for May, as well as the ISM non-manufacturing index for June also came in below their forecasts. According to the Fed funds futures, investors have pushed up the likelihood for a 50bps cut at the upcoming FOMC gathering, scheduled for the end of July. Specifically, that chance now is at 29.7%, while yesterday it was at 25%.
Speaking about central banks, yesterday, we had a Riksbank policy decision. The world’s oldest central bank decided to keep interest rates unchanged at -0.25% as was widely expected, and maintained the view that the repo rate “will be increased again towards the end of the year or at the beginning of next year.” Although officials noted that the risks surrounding developments abroad emphasizes the importance of proceeding cautiously with monetary policy, the Swedish Krona surged at the time of the release. Perhaps many participants (including us) were expecting the Bank to push back its guidance on rates amid dovish shifts by most of the major central banks. Remember that the Riksbank has been usually following the footsteps of the ECB in recent years and thus, the push back in the ECB’s guidance as well as signals for additional stimulus may have raised speculation that Swedish policymakers may delay plans with regards to higher rates.
Another great run by the US indices was seen yesterday, where the top 3 ones managed to reach new all-time closing highs. The Dow Jones, in particular, managed to hit the area slightly above the 27000 level, at around 27006. From there, the index retraced slightly to the downside. The DJIA is still trading above its short-term upside support line taken from the low of June 13th. Given that the index looks quite overstretched to the upside, there is a possibility to see a small throwback before another leg of buying, hence why we will stay cautiously bullish in the short run.
A drop back down could force DJIA to test the 26891 zone, marked by Monday’s high. Even if the price slides further, as long as it remains above the aforementioned upside support line, we will continue targeting the upside. A push back up could lead the index to the 27006 obstacle again, which is the all-time high so far. But if that obstacle breaks, the DJIA would confirm a forthcoming higher high and might travel further north into the unchartered territory. We could only assume where the next potential hold-up may occur. One of the levels that we may keep an eye on could be the 27100 zone.
Alternatively, a break of the previously-discussed upside support line and a push below the 26745 hurdle, marked by the intraday swing high of July 2nd, could invite the sellers back into the game. The next possible support area to be considered might be around the 26629 obstacle, which held the price from falling on July 1st and 2nd. DJIA might correct back up a bit, but if it remains below that upside line, we will remain sceptical of the upside, at least in the short run. The index could slide again and if this time it bypasses the 26629 zone, we will then aim for the 26495 level, marked near the lows of June 26th and 27th.
EUR/USD continued to drift lower this week, getting closer to its short-term tentative upside support line taken from the low of May 30th. We can see that the bears were held near the 200 EMA on the 4-hour chart, which could just act as a temporary pit-stop before another leg of selling. That said, given that the pair is slightly oversold on the shorter timeframes, we could see a small correction to the upside and then a move back down. This is why for now, we will remain cautiously bearish.
A small push higher could bring the rate to the 1.1312 barrier again, which showed good resistance yesterday and on Tuesday. If that barrier holds EUR/USD down once again, this is where the bears could re-enter the game and drive the pair towards the 200 EMA and the 1.1275 zone, which from Monday this week, keep on holding the rate from sliding further. If this time that zone fails to do the same, a break of it may send the pair a bit lower. This is when we may see a test of the aforementioned upside line, which could provide some additional support for EUR/USD.
In order to consider the upside, at least in the short run, we will take a more cautious approach and wait for the pair to break above the short-term tentative downside resistance line taken from the highest point of June. But for that better confirmation, it would be good to see a push above the 1.1360 area, which marks the intraday swing high of July 1st. If such a move occurs, our next possible target could be around the 1.1392 hurdle, a break of which might lift EUR/USD a bit higher, where it could test the 1.1413 level, marked by the highest point of June.
The calendar appears very light today. We already got Switzerland’s CPI for June, with the yoy staying unchanged at +0.6%. Eurozone’s retail sales for May are also coming out and the forecast suggests a 0.4% mom rebound after a 0.4% slide in April.
In the US, market will stay closed in celebration of the Independence Day.
As for the speakers, we have three on today’s schedule: BoC Deputy Governor Timothy Lane, ECB Vice President Luis de Guindos and ECB Chair of the Supervisory Board Andrea Enria.
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