Following a mixed dynamics in Asia, European stocks rose on Wednesday. The recent investor optimism was fuelled by remarks from Fed Chairman. Powell expressed optimism about economic growth and inflation, and also confirmed the country’s economy is ready for further gradual tightening. Today, markets are looking forward to hear another portion of positive comments from the Fed chairman during the second day of his testimony. As such, Britain’s FTSE 100 adds 0.61 per cent to 7,673, France’s CAC 40 gains 0.43 per cent to 5,445, while German DAX 30 rises by 0.57 per cent to 12,734. US stock index futures struggle for direction, but may open slightly higher.
The greenback extends gains Wednesday as the demand accelerated after Powell’s optimism. Amid the widespread dollar rally, the EURUSD pair retreated back below the 20-DMA and dropped back to lows marginally above 1.16. The local factors added to the downside pressure on the single currency. The June euro zone core CPI came in at 0.9% vs. 1.0% expected, which further reduces the chances for an earlier rate hike by the ECB, while the Fed head has just confirmed that the central bank stands ready to further tighten its monetary policy. Despite the ongoing depreciation, the technical indicators haven’t reached the oversold territory yet, which confirms that there is a room for further decline in the short term. However, should the buck lose its steam for now, the 1.16 area may serve as local support area.
GBPUSD dropped to fresh one-year low of 1.30. This is the key threshold as a break below will inevitably open the way to an even steeper decline down the toad. Apart from USD strength, the pound feels the pressure from the never-ending Brexit uncertainty, risks for the financial stability, and signs of slowing economic growth. As for the latter, the June CPI numbers showed that inflation slowed more than expected last month, which highlights the weakening inflation pressures in the country. By the way, the probability of an August rate hike by the BoE has fallen to 70% from 77% before the CPI report. On Thursday, the UK retail sales report is due, and the figures will set the short term tone for the pound.
USDJPY jumped above the 113.00 level, to fresh January highs. The widespread dollar rise coupled with Japanese weakness open the door to further ascent in the short term, especially if the greenback gets another boost from Powell. On the other hand, a daily close below the 113.00 figure could attract some profit-taking at interesting levels. The overall bullish trend, however, will remain intact as long as the pair is trading above 109.00.
Brent crude refreshed three-month low of $71,20 earlier in the day, with recovery attempts are still limited by the $72 region. The market continues to digest the risks for the market from the supply side as the prospects of global output rise are back on the agenda. At this stage there are no any signs of improvement in the market sentiment as traders still opt to exit longs after a period of a steady rise in crude prices. Should the barrel fail to hold above the $71 figure and remain under the $72 resistance, the price could dive even deeper, probably, to the $70 area which is key on the downside.
Meanwhile, spot gold continues to bleed, with new recovery attempts have attracted the selling interest around $1,245. So the yellow metal dropped to fresh one-year lows of $1,221. The strong dollar attracts demand on dips, which leaves no chances for gold as long as the buck has been trading within its bullish trend. As the Fed signals further policy tightening, the greenback will likely remain on the offensive against major rivals. Therefore, the precious metal could slip towards fresh long-term lows below $1,220 in the near future.
Nathan Lambert, Head of Global FX Analytical Department