Abu Dhabi, UAETuesday 10 December 2019

The euro and the pound take a back seat to the dollar and gold

Gaurav Kashyap says to watch US economic data and tariff moves for effects on the foreign exchange and commodity markets

Optimism around British Prime Minister Boris Johnson’s snap election decision has seen the pound find slight strength, but Gaurav Kashyap doesn't expect any major movements in the pound or euro. Photo: Bloomberg
Optimism around British Prime Minister Boris Johnson’s snap election decision has seen the pound find slight strength, but Gaurav Kashyap doesn't expect any major movements in the pound or euro. Photo: Bloomberg

Two of the major themes of 2019 — the European growth story and Brexit — have come slightly out of focus now. But the US Federal Reserve’s policies and the US-China trade war will continue to drive US assets, commodities and the foreign exchange markets.

Stronger-than-expected US data will fuel dollar bulls and vice versa.

Gaurav Kashyap

Overall, my long-standing bearish outlook for euro assets has not changed. The euro to dollar has continued to consolidate in the channel between 1.0990 and 1.1180. While we may have seen small waves of positive optimism take euro assets higher as a result of encouraging Brexit developments last month, overall slowing growth and weak price pressure open the door to potential action from the European Central Bank, keeping further upsides in the euro to dollar capped in my opinion.

While we have not seen a conclusive breakdown below 1.0990 levels for the euro, I expect to see another test of this level in the weeks ahead. With the usual monthly data releases set to underpin my negative sentiment, volatility should pick up as Brexit developments come back to centre attention next month in the lead up to the general election on December 12.

On the flip side, 1.1175 has been a stubborn resistance with immediate selling pressure coming in every time we see a rally to these levels. In current circumstances, a cheeky strategy would be to play this range with tight stop losses (at 1.0990 and 1.1175) until a more clear-cut trend starts to form in the New Year.

The pound to dollar has also been largely ranging, finding consolidation between 1.2750 and 1.30 levels. Optimism around Boris Johnson’s snap election decision has seen the sterling find slight strength. But like the euro, I am not expecting any major breakouts in and instead find upper resistance at 1.30 levels which may provide interesting shorting opportunities. Downsides in the pound would be restricted to 1.2770 in the weeks ahead.

After a stellar start to November — the US dollar index (a measure of the value of the US dollar against a basket of major currencies) moved as high as 98.20 levels — we have seen the index come off slightly as a result of recent uncertainty around trade talks. This has been coupled with weakening US data which markets have perceived to be dovish for future US interest rates.

The release of the Federal Open Market Committee (FOMC) meeting minutes this Wednesday will be key in divulging the background story behind last month’s rate cut and could provide further insight as to how the moods may have changed within the FOMC. I am also keeping a close eye out for next week’s US GDP reading, expected to come in at 1.9 per cent, followed by payrolls on December 6.

Again, stronger-than-expected US data will fuel dollar bulls and vice versa. And if we see President Donald Trump rolling back some of his proposed tariffs, this could spark further upsides in US indices and commodity markets.

Finally, gold has seen its fair share of pricing action through the early parts of November; after peaking at $1,515, the precious metal dropped as low $1,445 on the month and currently is trading at $1,472 levels. Trading has been choppy with a bullish bias.

Recent weakness in the aforementioned US dollar index has kept gold bulls interested, but I am not convinced by the precious metal’s rally and am not surprised momentum was lost every time it crossed $1,500. Personally, I will wait for another move above $1,500 before looking at shorting the metal. A more conservative approach however, would be to consider executing long positions starting from $1,440 levels.

Gaurav Kashyap is a market strategist at Equiti Global Markets. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti

Updated: November 19, 2019 11:37 AM

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