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US Dollar The Weakest Link Since Friday

Published 07/17/2017, 02:42 AM
Updated 04/25/2018, 04:10 AM
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FTSE +19 points at 7397

DAX +40 points at 12671

CAC +10 points at 5245

Euro Stoxx +5 points at 3530

The US dollar has been the weakest link last Friday, amid the US inflation came in softer-than-expected and the retail sales contracted by -0.2% month-on-month in June, versus +0.1% expected by analysts. The second consecutive month of contraction in the US retail sales further dampened the mood among the Federal Reserve (Fed) hawks. The US dollar index fell to its lowest since September 2016. The US yields remain soft; the 10-year yield is below 2.35%. The probability of a December Fed rate hike is down to 43.4% from 50% last week.

In China, the macroeconomic data tells a different story. The Chinese GDP grew by 1.7%q/q in the second quarter, up from 1.3% printed a quarter earlier. Growth improved to 6.9% on yearly basis. The retail sales rose by 11.0% year-on-year in June, the industrial production unexpectedly expanded by 7.6%y/y in the same month from 6.5% a month earlier. Hang Seng stocks and industrial metals had a lift at the start of the week. However, the Shanghai's Composite lost more than 1.0% on speculations that the People’s Bank of China (PBoC) wouldn't need to loosen the monetary conditions, as data dissipates worries regarding the Chinese slowdown story.

The AUD/USD soared to 0.7836, the highest level in more than a year. Carry traders are in charge of the market. The 0.80 level is on the radar with the sweet combination of softer US yields and stronger Chinese data. The daily relative strength index (74%) stepped in the overbought territory, indicating that a short-term tactical correction could be underway. Yet, the downside potential appears to be limited. Large call options are waiting to be exercised at 0.7760/0.7775 at today’s expiry.

Gold recovered to the 200-day moving average ($1,230) on the back of the softer US yields. The next positive targets are set at $1,239 (major 38.2% retrace on June-July decline), $1,247 (50, 100-day moving average) and $1,250 (50% retrace).

Cable finally cleared the critical Fibonacci resistance at 1.3045, the major 38.2% retracement on post-Brexit sell-off, and advanced to 1.3117. The UK June inflation and the Bank of England (BoE) inflation report hearings will determine whether or not the pound could consolidate strength in the bullish consolidation zone, above the 1.3045 level. The consensus for the June headline inflation is 2.9%y/y unchanged from a month earlier.

A read exceeding the 3% level should revive the BoE hawks and could cause severe tensions at the heart of the BoE's MPC (Monetary Policy Committee). In this scenario, the pound should resume its ascent against the US dollar. The next mid-term resistance is eyed at 1.3420 (50% level on post-Brexit decline). In contrary, a softer-than-expected inflation could cool-off the tensions regarding the UK’s rising inflation and prevent the GBP/USD form solidifying support above $1.30 level.

The EUR/USD trades just shy of the 1.15 mark. Solid resistance is seen at this level. The Eurozone's low inflation is already factored in the European Central Bank (ECB) expectations and should not cause any unexpected market reaction. The ECB will meet on Thursday and is expected to maintain the interest rates unchanged. The accompanying statement will be the main highlight this week. Investors are craving for insightful details about the ECB’s plans to unwind its Quantitative Easing (QE) program.

In the dirt of a clear guidance, there is a large window for speculation on the ECB’s next move regarding its asset purchases program. At this stage, the ECB could reasonably be expected to reduce the size of monthly purchases and stay flexible on the duration of the program. If President Mario Draghi’s committee meets the hawkish expectations at this week’s meeting, there could be a positive breakout in EUR/USD above the 1.15 hurdle. An unexpected and undesired ECB silence could squeeze the euro markets lower. At the moment, traders remain buyer at dips. Short-term support is eyed at 1.1414 (minor 23.6% retrace on June-July rise) and 1.1368 (major 38.2% retrace). The EUR/USD call options trail from 1.1150 up to 1.1600 at today’s expiry.

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