The strong US dollar is driving global currency markets, as the Federal Reserve (Fed) is expected to pursue a 25 basis points hike at December’s meeting.
The euro and the Australian dollar are giving back weekly gains against the US dollar.
Gold slipped below $1200 for the first time since February. The UK’s gold miners, Fresnillo (LON:FRES) (-0.56%) and Randgold Resources (LON:RRS) (-1.76%), began the day in negative territory and are expected to extend losses along with the cheapening gold.
Over the past four weeks, analysts have trimmed their 2016 net income expectations by 3.55% for Randgold, by 4.89% for Fresnillo; adjusted earnings per share forecasts fell by 2.45% and 2.78% respectively.
Rising US yields should continue weighing on gold prices for a further slide to $1170 (major 61.8% retracement on Dec’15 to Jul’16 rise).
Euro hits 1.0525
The diverging yield spread between the Eurozone and the US hints at a further depreciation in the euro versus the US dollar.
The European Central Bank (ECB)’s Stability Report will be in focus today; traders will attempt to comprehend the ECB’s reaction to the hawkish Fed outlook. Although a hawkish Fed takes decent weight off the ECB’s shoulders, the ECB is expected to announce the extension of its Quantitative Easing (QE) programme beyond March 2017. As we expect the ECB to continue buying Eurozone bonds for at least another six months, the Committee could refrain from revealing the quantity of purchases at December’s meeting.
Gilts pare losses post-Autumn Statement
The UK’s yield curve has steepened considerably over the past week. 10-Year yields rose by 80 basis points, while 30-Year yields surged by 100 basis points.
The Autumn Statement revealed the British government’s plans for higher borrowing to temper the Brexit effects on the economy. According to the latest budget statement, the British government is expected to write an additional £122 billion deficit over the next five years, compared to the March Statement. As such, the UK’s budget balance is no longer expected to turn positive by 2020, as envisaged before the UK’s decision to leave the European Union.
Following the wild sell-off in the Gilts market, a correction is underway, especially on the short portion of the curve. The 2-Year yields fell 11.57% to a one-month low, as the 10-year yield retreated by 1.93% so far in the session.
The prospects of a larger budget deficit is fundamentally negative for the pound and is expected to hand the market back to the GBP-bears. The euro-pound is expected to recover above the 0.85 handle, while the pound-US dollar should challenge the 1.24 support level before the weekly closing bell.