FXTM Research Analyst Lukman Otunuga comments on the explosive combination of Dollar strength and risk aversion & its effect on Gold.
Global stocks were mixed during trading on Monday, with participants adopting a defensive stance after the heightened geopolitical risks weighed heavily on sentiment. Asian shares simply struggled for direction amid the cautious trading mood and the noticeable anxiety has limited gains in Europe. With the lingering sense of caution creating a lacklustre trading atmosphere, Wall Street may struggle to find the momentum needed to venture higher this afternoon. Stock markets could come under renewed selling pressure, as geopolitical risks are compounded with the messy mixture of political uncertainty, Brexit woes and Trump developments.
Dollar Index breaks above 101.00
The Dollar Index breached above the 101.00 resistance level on Friday, after markets received March’s mixed US jobs report positively. Although the dismal NFP figure of 98k initially sparked some jitters, this was swiftly countered by the unexpected decline in unemployment rates that dropped to their lowest levels in almost 10 years at 4.5%. The upside seen in the Dollar was complimented by hawkish comments from the Fed’s Dudley, which bolstered speculation of more rate hikes this year. Whilst the geopolitical risks and renewed expectations of further rate hikes may support the Dollar bulls, the ongoing concerns over Trump’s ability to move forward with tax reforms could create some headwinds and limit gains down the line.
Sterling slides below 1.2400
Sterling was exposed to steep losses last week, following the unexpected drop in the British manufacturing output which reignited concerns over the health of the UK economy as it prepares to depart from the EU. A resurgent Dollar from the mixed NFP report fuelled the downside and provided a foundation for bears to drag prices below the 1.2400 level. With the bias towards Sterling firmly bearish amid the ongoing Brexit uncertainty, further downside may be expected with any technical bounces seen an opportunity for sellers to attack prices lower. From a technical standpoint, bears need a solid daily close below 1.2370 which could open a path lower towards 1.2300.
Currency spotlight – EURUSD
The growing uncertainty ahead of the upcoming French presidential elections has haunted investor attraction towards the Euro. Markets are still weighing the possibility of Eurosceptic Marine Le Pen winning the elections and the jitters have translated to downside further shocks for the Euro. With the Dollar back in fashion amid the speculations of higher US rates, the EURUSD remains under intense selling pressure. From a technical viewpoint, the EURUSD fulfils the prerequisites of a bearish trend on the daily charts as there have been consistently lower highs and lower lows. The solid breakdown below 1.0600 could encourage a further decline back towards 1.0500.
Commodity spotlight – Gold
The explosive combination of Dollar strength and risk aversion left Gold chaotic on Friday, with prices eventually concluding the week below $1260. While the metal remains supported in the medium to longer-term amid the geopolitical tensions and political risks across the globe, the renewed rate hike expectations could enforce downside pressures in the short term. Gold’s trajectory on the daily charts remains tilted to the upside, with bulls in firm control above the $1240 higher low. From a technical standpoint, a solid daily close above $1260 is needed for any further upside. In an alternative scenario, a breakdown below $1240 may open a path back towards the $1225 support.
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