Author: Han Tan, Market Analyst at FXTM
Dollar bulls have been showing signs of nervousness this week, with the US Dollar index (DXY) testing the 96.8 support level in recent days. Recent rhetoric by Fed officials have cracked open the door for policy easing this year, as markets pile on the bets that a US rate cut could come as soon as July, all of which is putting downward pressure on the Greenback.
Given the Dollar’s sensitivity of late, traders may parrot the Fed’s claims of being “data-dependent”, whereby Friday’s US non-farm payrolls could prompt an outsized move in DXY. A much weaker-than-expected jobs report could see the Dollar index opening up a path towards the lower bounds of the 96-handle, while justifying calls for a US rate cut.
Euro gains as ECB indicates willingness to continue supporting EU economy
The recent rise in EURUSD met resistance at the 1.13 level this week, as ECB President Mario Draghi signaled continued policy support for the EU economy amid heightened uncertainties on the global stage. Although appearing less dovish than expected, the European Central Bank has pledged to hold rates at historic lows until at least early 2020, as the EU economy contends with persistent uncertainties on the global stage.
According to Draghi, incoming data points towards weaker growth in Q2 and Q3, even as growth projections were revised downwards for both 2020 and 2021. Headline inflation is also likely to decline over the coming months. With risks in the form of Italy’s budget conflict, Brexit uncertainties, and persistent trade tensions exposing the Eurozone to negative shocks, the outlook for the Euro remains tilted to the downside, which makes any meaningful gains for the bloc’s currency that much harder to come by.
Markets cast watchful eye over US-Mexico negotiations
Equity markets are set to carve out gains on Friday ahead of the June 10 deadline for US tariffs being imposed on Mexican imports. Investors appear to be holding out hope that the ongoing US-Mexico negotiations could at least result in a delaying of the five percent US tariffs, as already heightened barriers to global trade cast a very dark cloud over the global economic outlook.
In the event that President Trump holds off on imposing the new tariffs come Monday, that should allow some breathing space for risky assets to notch limited gains. However, should those US tariffs be imposed next week, safe haven assets such as Gold and Yen could climb another leg higher, while global stocks and EM currencies could see another selloff.
Markets are clearly nervous about the potential fallout from the intensifying US-led trade conflict against its major trading partners, with a full-blown US-China trade war threatening to fuel fears of a recession. Such a backdrop may lead to a new 2019 high for Gold, with Bullion having gained over two percent this week, while the Yen threatens to strengthen past the 108 psychological mark against the US Dollar.