Dollar strong as 2019 gets underway

By David Morrison  |  02/01/2019 15:42

The first trading day of the New Year has seen the US dollar soar and equities decline. Meanwhile, gold seems to be back in favour with investors

The US dollar has made a strong start in this holiday-shortened week with risk-off once again the dominant theme. On the first trading day of the New Year, global equity markets have fallen sharply while gold continues to attract buyers. Overnight there was further evidence that the Chinese manufacturing sector is contracting adding to global slowdown worries. The Caixin Manufacturing PMI fell below 50 for the first time since June 2017. This followed on from the weekend’s sub-50 reading in the official Manufacturing PMI which registered contraction for the first time since August 2016 and was also the lowest reading since February that year. On top of this we have the ongoing US government shutdown while last month’s meeting of the US Federal Reserve suggested that monetary tightening would continue, despite the sharp sell-off in equities which began in October. Today’s fall in the major indices will disappoint investors hoping for a rebound and a retest of the key S&P resistance level which currently comes in around 2,600. The index really needs to recover back above this level to wipe out the losses seen since mid-December. A failure to do so over the coming weeks would suggest that global equities could come under further selling pressure, particularly as both the 50 and 100-day moving averages have now crossed below the 200 on all the major US indices, suggesting that the overall market trend has shifted from positive to negative.

Non-Farms in focus

Friday’s US Non-Farm Payrolls is the key data release this week, although we will also see the ISM Manufacturing PMI on Thursday. The consensus expectation is for a payroll increase of 178,000 while the unemployment rate is forecast to hold at 3.7% for December, unchanged from the previous month. Average Hourly Earnings are expected to tick up to +0.3% month-on-month from +0.2% in November. Later in the day Fed Chairman Jerome Powell will participate in a panel discussion – his first major outing since the December Fed meeting. This was when Mr Powell and his colleagues on the FOMC surprised many investors by their hawkish outlook as they indicated their willingness to raise rates further while continuing to reduce the US central bank’s balance sheet.

EURUSD tests support

The Euro/USD was sharply lower this morning and retested support around 1.1360. This weakness comes on the back of poor Manufacturing PMIs from across the Euro zone. The move looks as if it could continue unless Friday’s jobs data disappoints and Jerome Powell sounds less hawkish than of late. But while the Non-Farm release is notoriously volatile, Mr Powell is unlikely to hint at a dovish pivot so soon after the December meeting. Nevertheless, investors should prepare for further big swings in financial markets and adjust to this new environment where central banks pull back from providing the monetary stimulus which has done so much to boost asset prices over the last ten years.

Gold shines

Meanwhile, gold has just hit a fresh six-month high as investors shift money out of equities and into alternative investments, as well as the traditional safe-haven of US Government bonds. The next upside target for gold is the $1,300-1,310 resistance range. However, a pull-back and consolidation around $1,260 or even $1,240 can’t be ruled out, particularly if we see another sharp counter-trend rally in equities.

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