EURUSD slips after strong gains

By David Morrison  |  10/01/2019 16:08

The dollar recovered a touch ahead of a speech from Fed Chair Powell after falling sharply on Wednesday. Markets react to dovishness from US central bank
 
EURUSD

The EURUSD was a touch weaker in early trade on Thursday. But losses were modest and did little to counter the sharp dollar sell-off from the previous day. The major part of the greenback’s sell-off followed a series of dovish speeches from Federal Reserve members and the dollar was unable to make up lost ground following yesterday’s release of minutes from last month’s Federal Reserve monetary policy meeting. The minutes were surprisingly dovish, when compared to the Fed’s original statement and the accompanying Summary of Economic Projections from the FOMC. The minutes Indicated that many Fed members felt that it was reasonable to take a pause in tightening monetary policy further given muted inflationary pressures. In today’s session, traders seemed unwilling to push the currency pair too much in either direction ahead of another clutch of Federal Reserve speakers including Fed Chair Jerome Powell. Just last Friday Mr Powell took many by surprise when after months of lauding the strength of the US economy, insisting that further rate hikes were necessary, and that balance sheet reduction was on autopilot, he dialled back on all this suggesting that it could be time to bring a halt to monetary tightening. This has led to fresh suggestions that, contrary to popular belief, his decisions over monetary policy are influenced by stock market gyrations, just like his predecessors Yellen, Bernanke and Greenspan. In other words, we have a ‘Powell Put’ which looks as if it gets triggered whenever the S&P goes into a ‘bear market’, that is falls 20% from recent highs. It will be interesting to hear if Mr Powell’s new-found dove finds expression in tonight’s speech in Washington. If so, then the EURUSD should consolidate above 1.1500 for now.
 
Crude oil

WTI crude slipped in early trade on Thursday, made back its losses ahead of the US open, only to head lower once again. Traders appeared to be catching their collective breath following the gains made since the beginning of the year. On Tuesday WTI surged back above $50 per barrel and is now up over 20% from the 18-month low hit in December. Oil was heavily oversold at the end of last year and so a bounce was on the cards. This was helped along by a general recovery in all risk assets after the US Federal Reserve Jerome Powell indicated that the central bank may take a pause in hiking rates and consider halting its balance sheet reduction programme. Sentiment also turned positive after the People’s Bank of China announced cuts in the Reserve Requirement Ratio and as the US and China met for trade talks. The latter ended yesterday, and while nothing substantial was agreed, they were viewed as setting the stage for further dialogue. However, a slew of data releases warn that global economic growth is slowing, and in some cases (notably Germany and Japan) declining. Overnight there was further bad news as Chinese CPI and PPI came in well below expectations, raising fears that deflation could be on the cards, despite years of fiscal and monetary stimulus. This has all led traders to worry that forecasts for crude demand growth will have to be revised down further. This comes as US crude inventories fell less than expected while there was a sharp jump in gasoline stockpiles. Overhead resistance comes in around $54 for WTI with support at $50. At the time of writing that left the front-month contract right in the middle of the range as traders awaited speeches from another clutch of Fed members including Chairman Powell.
 
Gold

Gold drifted lower in early trade on Thursday, constrained by a modest rise in the US dollar. Nevertheless, the technical outlook for the precious metal looks constructive as it consolidates above $1,280 with resistance coming in around $1,300. Gold is up by 11% since it broke below $1,200 to hit a 20-month low in August last year. The dollar is little-changed over the same period suggesting that gold has benefited from a build-up in its safe-haven appeal, particularly as investors dumped riskier assets from October to the year-end. Nevertheless, traders will continue to keep a close eye on the greenback as over time it inversely correlates to moves in the dollar price of gold. Yesterday the Dollar Index broke back below 95 for the first time since October, despite considerable confusion over the outlook for further Fed tightening in 2019. Over the past week the market has gone from pricing in a rate cut to pricing in a rate hike. Despite this, the Dollar Index chart looks as if prices are rolling over as the basket repeatedly failed to break above 97 from October through to December last year. Further weakness will help to boost dollar-denominated commodities, including gold and silver.
 
 
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