The sell-off in technology stocks led the European equity markets lower on Wednesday, with the major indices suffered a 1 per cent drop in early session as yesterday's US negative trading extended to Asian and then European trading. However, the pressure has eased somewhat as Facebook shares recovered 1.6% after announcing privacy-setting changes. Additionally, there are some positive developments from North Korea on the back of Kim Jong Un's visit to China, which increasing chances of denuclearization. But the trade war fears continue to persist, and now investors are focused on the expected announcement of China’s list of retaliatory tariffs on US exports. Against this background, it’s still too early to expect the end of correction, especially amid month-end flows which increase the volatility. So the European stocks continue to trade close to one-year lows, with the Britain’s FTSE 100 moved up 0.29 per cent to 7,020, Germany’s DAX 30 lost 0.76% to 11,879 and French CAC 40 dipped 0.46% to 5,091.
In the currency markets, the USD rebound is the dominant theme at the moment. The greenback received the additional bullish driver from fresh US economic data. The second revision of GDP showed the economy expanded at an annualized 2.9% in 4Q against the previous estimate of 2.7%. Besides the better than expected revision to GDP, personal consumption was revised to +4.0% vs +3.8% in the second reading. However, a wider than expected trade deficit has limited the greenback’s bullishness. EURUSD remains in the familiar range, trading below the 1.24 mark. As month-end positioning in the market is the main reason behind dollar’s better sentiment, the euro may continue its correction in the short term, though the bearish potential in the pair is still limited, especially as long as the single currency remains above the 20-DMА at 1.2350.
GBPUSD pair is under a mild bearish pressure, despite USD demand. After yesterday’s dive below 1.42, the pair is trying to keep above the 1.41 threshold. Poor Confederation of British Industry index on retail sales, which came at -8% against an expected 15% advance, increased pressure on the pound and derailed its early attempts to test the 1.42 figure. As the resurgent U dollar demand continues to drive the pair, the immediate risks are skewed to the downside. A break below 1.41 will open the way to 1.4065. On Thursday, the pound will have a big test as the UK releases a set of economic data including GDP numbers, while the US publishes important personal consumption expenditures report.
USDJPY jumped to one-week highs at 106.33 on the back of better-than-expected US GDP and despite a quick retreat remains mildly above the 106.00 level. The dollar needs to close above the psychological mark in order to confirm a better tone in the short term. In a bigger picture, however, the pair is still trading within a bearish trend which will hardly be derailed as long as global stocks remain on the back foot and the trade war concerns persist. The immediate upside target for the greenback is the 106.60 area.
Brent crude prices are treading water around $69. The asset lacks impetus to regain the bullish tone following a two-day correction from tops above the $70 threshold. According to five OPEC sources, the cartel and its independent allies will most likely maintain supply quotas for the second half of the year, which is positive for the market. But it is also reported that producers could consider adjusting the quotas if the market becomes tight. And this may fuel speculations about increasing OPEC production after the June meeting. On top of U shale production concerns, this could open the way for a more aggressive retreat in prices.
Gold prices extend the downside correction for the second day in a row, nearing the $1.330 area amid resurgent dollar demand. The yellow metal responds aggressively enough to the greenback’s dynamics lately as it has lost its attractiveness as a safe haven asset and is more exposed to downside risks from the “dollar factor”. As month-end flows drive the US currency higher and may continue to do so in the coming days, there is a risk of further downside move in gold prices. Should the price dip below the $1.330 mark, the next support is expected at $1.324.
Nathan Lambert, Head of Global FX Analytical Departament