European stock markets opened marginally higher Monday, but failed to preserve a tepid upside momentum after the Chinese equities suffered amid renewed trade tensions after China announced another set of tariffs on US goods. Shares in Europe also decline amid the growing threat of a no-deal Brexit and a dramatic drop in the manufacturing activity in Germany. As such, Britain’s FTSE 100 sheds 0.17 per cent to 7,646, France’s CAC 40 loses gains 0.16 per cent to 5,470, while German DAX 30 declines by 0.19 per cent to 12,592. US stock index futures point to slightly higher open.
In the currency markets, the dollar is the strongest currency of the day. The USD index is probing the 95.50 level once again. The currency received a boost from Friday’s US jobs data which confirmed that the Fed will proceed with gradual rate rises toward a neutral policy stance. Another bullish factor for the greenback is further rise in the USD/CNY after Friday’s PBOC decision to move its FX forward reserve requirement to 20% from 0%. Meanwhile, Fed’s Bullard said that waiting for an ‘inevitable recession’ is wrong, which supported the buck as well. At this stage, the dollar bulls need to confirm a break above the mentioned 95.50 figure by a daily close higher. Otherwise, the correction risk will rise.
The pound is the weakest currency today. GBPUSD dropped to a one-year low of 1.2919 after failed attempts to regain the 1.30 threshold. Sterling fell victim to two key bearish drivers in the form of widespread dollar demand and the increasing concerns over the ‘divorce’ process with the EU. The UK Trade Minister Liam Fox said that ‘no deal’ Brexit is more likely than not, while the UK government spokesman noted that May still believes ‘no deal’ Brexit is better than a bad Brexit deal. Against this backdrop, traders rushed to price in a hard Brexit, which drives the pound lower. Now, all eyes turn to May’s negotiation both with parliament and with Brussels. Any fresh negative signals from this front will depress GBPUSD even more. In the short-term, the pound looks attractive for buyers which could lead to a partial recovery. But the overall trend will remain deeply negative, and the 1.29 level remains vulnerable.
EURUSD is also on the defensive, driven lower by dollar bulls. The pair dipped to more than one-month low of 1.1529 earlier in the session and now tries to regain ground, though remains firmly in the bearish territory in the daily charts. Apart from strong dollar, the single currency feels the pressure from economic signals as industrial orders in Germany declined dramatically. The general tone in the pair still hinges on the sentiment around the buck as ECB Novotny’s ‘hawkish’ comments failed to reverse euro’s losses. The central bank official supported a ‘faster’ normalization of monetary policy and noted that slow increase in rates would not harm the EU economy. Traders so far refrain from a meaningful reaction to such signals, probably waiting for a confirmation from Draghi himself before making any conclusions. However, the pair has been nursing losses for a fifth day in a row and could regain some ground should the dollar index retreat from an important 95.50 level in the short term.Brent crude has resumed the recovery after a flat close on Friday. The price has returned to the 20-DMA just below the $74 level, but doesn’t dare to challenge this figure so far, though it has touched a three-day high of $74.09 earlier in the session. According to Baker Hughes data, US drillers cut two oil rigs last week, bringing the total count down to 859. This coupled with the news from Saudi Arabia allowed a fresh buying impetus at the start of a new trading week. Last month, Saudis unexpectedly cut crude oil output by some 200,000 bpd, despite in June, the de-facto OPEC leader pledged to increase its production in order to cool down oil prices. Another source of bullishness in the market are the rising concerns over demand against the backdrop of a US-China trade war. This factor could further support prices, especially should the trade tensions escalate further. But for a more impressive rise, Brent will need additional catalysts.
Nathan Lambert, Head of Global FX Analytical Department