Macro economics

Analytics on 13/09/2018. Risk sentiment improves further, dollar hit by dismal inflation numbers

The European stock markets started the day with a mixed tone, but turned slightly higher afterwards as the global risk sentiment continues to improve. US and China set to resume trade talks, which fuelled risk-on environment as well as a jump in Turkish lira after the CBRT decision to raise one-week repo rate to 24.00% from 17.75% vs 21.00% expected. As such, Britain’s FTSE 100 loses just 0.07 per cent to 7,308, France’s CAC 40 gains 0.49 per cent to 5,358, while German DAX 30 rises by 0.58 per cent to 12,101. US stock index futures edge higher in early pre-market trade as inflation numbers came in lower than expected. Investors are also cheering some easing in trade tensions.

The greenback turned lower across the board after the report showed that the US CPI rose by just 0,2% instead of the expected acceleration to 0.3% in August. After yesterday’s dismal PPI data such results were not very surprising, but have hit the greenback in contrast to the recent rise of the Fed tightening expectations. Upbeat Draghi’s rhetoric has added to the pressure on the buck as the ECB governor said that data broadly confirms the central bank’s assessment of convergence toward target and that the euro zone economy has grown above potential for some time. As a result, following the indecisive consolidation, EURUSD spiked north, towards the 200-DMA, where the price has refreshed September highs in the 1.1680 region. This coupled with some signs of easing trade tensions between the US and China paints a rather gloomy short-term picture for the dollar. On the other hand, the ECB meeting results in general were not obviously “hawkish” and this should cap the pair’s bullish potential.

GBPUSD jumped to levels just below 1.31 and could challenge this local resistance amid a broad dollar weakness, while the Bank of England meeting came as a non-event for the markets as expected. The key takeaway from the meeting is that the regulator highlighted greater Brexit uncertainty, but in general this is not new as well. Apart from that, the central bank raised its Q3 GDP growth estimate from +0.4% q/q to +0.5% q/q, and sterling took it positive. Against this backdrop, the pound managed to shrug off the reports that the European Commission spokesman said the EU will not reconsider the elements of Brexit bill that has already been settled, including the divorce bill. This means that another deadlock could be on the way as the UK is not going to pay the bill if the agreement is not reached. Therefore, Brexit remains a factor of uncertainty and risk for the pound, and this could cap the upside potential in the pair down the road.

The USDJPY pair has trimmed intraday gains following the disappointing US CPI report. The price has retreated from the 111.65 area which caps the upside for the third day in a row, and found some support at the 20-hour moving average around 111.40. The downside risks for the pair look limited for the time being despite the general dollar retreat as the yen safe haven demand has abated after the risk-on sentiment reemerged in the global financial markets. Apart from risk sentiment, the pair will follow further economic signals from the US which could affect the expectations of further rate hikes by the Fed. In this context, traders will now shift focus to the US retail sales report due on Friday. Should the numbers disappoint again, the pair could slip down further, but the bearish risks are limited as long as the 111.00 serves as the intermediate support.

Gold prices were inspired by dollar selling and managed to progress with the timid recovery. The yellow metal has reached two-week highs above $1,211, where the rebound has faltered as the price has encountered the Bollinger bands on the way north. In the short-term, the precious metal could trim its gains but may stay on the offensive as long as the dollar has been digesting the dismal inflation figures. In the longer term, should the greenback derail its upside trend, the bullion could regain the $1,220 level, but as long as the recovery remains unsustainable, the risk of selling on rallies remains high.

Nathan Lambert, Head of Global FX Analytical Department

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Interest rates

Country Rate Value
USA Federal Funds 0,25 %
Switzerland 3 Month LIBOR Range -0.75 %
United Kingdom Repo Rate 0,10 %
EU Refinancing Tender 0,00 %
Japan Overnight Call Rate -0,10 %
New Zealand Official Cash Rate 0,25 %
Australia Cash Rate 0,25 %
Canada Overnight Rate Target 0,25 %
All rates
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