European stocks are trading on a positive note after a mixed dynamics earlier in the session. The political situation in Italy remains a drag as the two parties are to decide now who to nominate to the role of prime minister. The recent rise in the US Treasury yields also limits investors’ buying enthusiasm this week. As for the economic picture, the euro area and German data was mixed, with a negative bias.
As such, FTSE 100 gains 0.48 per cent to 7,748, France’s CAC 40 adds 0.37 per cent to 5,561, while German’s DAX 30 rises by 0.13 per cent to 12,994. Meanwhile, Wall Street futures are slightly lower due to a lack of progress in US-China trade talks, with US ambassador said earlier in the day that the two countries are still very apart on trade.
The greenback, which was on the offensive before the key economic report, has accelerated its ascent after the release. Retail sales excluding autos increased by only 0.3% vs 0.5% expected. But the previous results were revised upwards significantly, from 0.2% to 0.4%, so the report turned out not so bad on the whole. Besides, US Empire Manufacturing index for May came in at 20.1 vs 15.0 expected, with the prices paid index was the highest since June 2011, and gains were registered across all categories. Therefore, the dollar continued its recovery after some consolidation in the early European hours.
The EURUSD pair failed to challenge the key 1.20 figure yesterday and resumed its bearish move. The price has already broken below 1.19, close to 2018 highs reached last week. The euro area Q1 GDP came in as expected, while the German economy decelerated more dramatically, which confirms that the European economy feels worse this year. Such a background implies that the ECB wont’ hurry with tightening for the time being. Meanwhile, the greenback looks set for further gains as the fundamental picture remains quite robust, the Treasury yields are high, and Trump has somehow softened his rhetoric with China. From the technical point of view, EURUSD needs to keep above the 1.1820 area to preserve the 1.18 mark and prevent further losses.
GBPUSD was treading water around the 200-DMA which capped gains for the last nine days and dropped sharply amid a widespread dollar rebound following the retail sales data. The price slipped below 1.35, but tries to limit losses around the support zone formed by 1.3880. UK March average weekly earnings came in at +2.6% as expected, while unemployment rate stayed at lowest point since 1975. The releases had a very limited impact on the pound which is now highly dependent from the overall sentiment around the US dollar. Besides, the key April’s UK inflation report due next week makes traders take a wait-and-see approach.
USDJPY touched fresh early-February highs above the 110.00 level following the US retail sales data release. The pair reached the 110.30 area, keeping the bullish bias, though the risk of profit taking at the current attractive levels is relatively high. The dollar needs a daily close above the mentioned psychological level to confirm the bullish break. In this scenario, the pair will target the next resistance at 110.50. Despite the yen lacks safe-haven demand for now, the probability of another bullish wave in the short term is low.
Brent advanced through another psychological level $79 and refreshed November 2014 highs at $79,43. Here, the asset attracted a partial profit taking and has corrected below the mentioned mark, though remains in the positive territory so far. The latest bullish wave was fuelled by geopolitical tensions in the Middle East, where Palestinians clashed with the Israel military at the border between the Gaza Strip and Israel. The OPEC report, published yesterday, also helped the bulls as the cartel has revised up its global demand growth outlook. However, the profit taking may accelerate in the short term ahead of the weekly API crude inventories report. In the bigger picture, Brent may test the key $80 level in the coming days.
Spot gold plunged below the psychological level $1,300 and reached fresh 2018 lows amid the dollar rally across the board. After the yellow metal lost the 100-DMA late April, a break below $1,300 was a matter of when, not if, as the dollar bulls send rather strong signals lately. The recent retreat in the buck has allowed gold prices to recover a bit, which was a new opportunity for bears. The next downside target for the precious metal is the $1,296 area which should limit the pressure, should the greenback slow down its ascent in the nearest future.
Nathan Lambert, Head of Global FX Analytical Departament