European stock markets wobbled in early trade on Tuesday, with the major indexes show a mixed dynamics on this last day of July. Stoxx 600 set for gains this month. As for the earnings season, BP and Credit Suisse second-quarter profit beat expectations, which supported a more upbeat tone in the regional markets. Meanwhile, trade-war fears continue to abate, also helping to lift investor sentiment. As such, Britain’s FTSE 100 adds 0.66 per cent to 7,751, France’s CAC 40 gains 0.18 per cent to 5,501, while German DAX 30 loses 0.11 per cent to 12,784. US stock index futures trade higher amid a bounce in tech shares after a massive sell-off.
The dollar has been was mostly on the defensive, nursing losses against major rivals except for the yen which declined after the Bank of Japan meeting. The central bank left its ultra-loose policy in place. The dovish statement, in which the regulator announced its policy rate and yield target remain unchanged, sent the 10-year Japanese yields the yen down. As a result, the USDJPY pair jumped to the 20-DMA around 111.60, from where it was slightly rejected after mixed US data. US June PCE core inflation came in at +1.9% vs. +2.0% y/y expected, pointing to a slowing price pressure in the country. Meanwhile, the prior personal spending results were revised from 0.2% to 0.5%, which partially offsets the negative impact. The numbers are not supposed to alter the Fed’s view in terms of further tightening, therefore the USD weakness should be limited and short-term.
The EURUSD pair has jumped to the 1.1745 area following the release, also fuelled by stronger-than-expected euro zone CPI data published earlier in the day. The European inflation rose to 2.1% in July, above the ECB target. The market expected the CPI to increase by 2% y/y. In a separate report, French inflation also came in higher than expected, at 2.3% vs. 2.1%. The accelerating inflation growth in the region could lift market expectations over the first rate hike by the ECB. On the other hand, a weaker-than-expected GDP numbers – on the back of lower business confidence on trade worries – may prevent the monetary authorities from a more rapid tightening, especially as the risks for the global economy from the trade tensions remain. As such, EURUSD is unlikely to proceed with its bullish move, and the catalyst for a downside correction could emerge as soon as on Wednesday, when the Fed two-day meeting concludes.
As for crude oil markets, there is still a large degree of uncertainty over the balance of demand and supply on the global level, and the current Brent’s behavior confirms this. The price has managed to regain the $75 mark but still lacks the impetus to target higher levels as traders assess the potential volumes of supply from Saudi Arabia, Russia and the US. By the way, the oil-rig count increased last week for the first time in three weeks, which signals that fresh record production volumes in the US shale fields may come soon. This factor has been limiting the bullish potential in the market for now. In the bigger picture, Brent continues to regain ground this week, after a decent rise over the course of last week. The market just needs some additional catalyst to push north and get back above the $76 barrier.
Spot gold continues to drift lower even as the dollar bulls have become much less aggressive lately. The yellow metal declines for a fourth day in a row after a brief pause, with this year lows around $1,210 are still in the game. As long as the price remains below the $1,240 region, the precious metal will remain vulnerable to further losses, though it looks like the bearish momentum is getting slower gradually. Nevertheless, it’s still too early to call a bottom for gold, especially against the backdrop of a potentially more “hawkish” Fed.
Nathan Lambert, Head of Global FX Analytical Department