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By Jameel Ahmad, Chief Market Analyst at FXTM
INDICES AND PBOC
After being vulnerable to losses throughout last week as investors appeared to toy with the idea of closing positions, global indices have commenced the week looking more positive. A variety of different factors have combined together to raise investor sentiment, with this including an unexpectedly smooth UK election being absent of any controversy, and the US non-farm payrolls (NFP) providing a reminder to the markets that the Federal Reserve will continue to remain both cautious and hesitant when it comes to raising interest rates. The People’s Bank of China (PBoC) has also provided a helping hand to indices, following the central bank easing monetary policy once again with another interest rate cut over the weekend.
The interest rate cut from China wasn’t completely unexpected, and to be honest some could even suggest that the main surprise was that interest rates were not lowered even further. The PBoC has been increasing active when it comes to easing monetary policy over the past months, and another interest rate cut is just the latest in a long line of increased stimulus measures being used to reinvigorate economic momentum. Concerns remain because the latest GDP reading was announced at the lower range of the government’s 7% target, and although the PBoC was expected to provide more time for the stimulus measures to work before acting again, last week’s trade data re-highlighted weaknesses and probably forced action.
The PBoC will probably and aggressively defend the 7% GDP target and if any doubts occur over whether Beijing’s objective can be achieved, the PBoC will continue easing policy. The recent trade data was interesting because although import data has been declining consistently for some time, there was also a noticeable decline in exports. The export figures provided a reminder that it is not only declining domestic momentum that is a concern, but that the economy is also vulnerable to risks outside China. Previously, it was domestic data that was seen as the major catalyst behind declining momentum. Keep a very close eye on the upcoming Industrial Production and Retail Sales release. If these are announced below expectations, we are likely to see the markets pressure the PBoC for even further policy moves.
CURRENCY MARKETS
Moving onto the currency markets, the prospects for the Euro are looking bleak with the EURUSD at risk of dropping back towards 1.10. Greece is once again weighing on investor sentiment, with the ongoing talks causing concern to spectators largely because the talks themselves are failing to present anything tangible. While Eurogroup Chair Jeroen Dijsselbloem has been reported to have stated that some progress has been made, this isn’t the first time we have read something encouraging to later find that we are still far from reaching an agreement. It is still highly unlikely that an agreement will be reached during the Eurogroup meeting on Monday and for as long as this ongoing Greece situation drags on, the Euro will remain vulnerable to losses.
After the conclusion of the UK election, Sterling volatility is calming down with the GBPUSD consolidating around 1.54. Now that the UK election is finally out of the way, investors may begin redirecting their attention back towards the UK economic outlook and interest rate policy from the BoE. When you look at the technicals, the GBPUSD is clearly finding it tough to surpass 1.55 and it’s possible we have set a new upper range for the pair. The US NFP has limited the chances of another USD sell-off, meaning that whether the GBPUSD can surpass 1.55 is going to be more dependent on the BoE encouraging Sterling bulls by talking hawkish later this week and reinforcing that its next policy move will be an interest rate increase.
Elsewhere, the USD is trading higher against the bulk of its major trading partners following the NFP providing the required assurances that the Fed remains on course to begin raising interest rates later this year. Although the United States adding 223,000 jobs to the economy might not be eye-catching enough to get the USD bulls rallying again, the job report was in line with expectations and will reduce underlying concerns that the Fed might swerve away from its repeated commitment to begin raising interest rates in 2015. What has probably denied the USD bulls momentum to charge forward is the sharp downward revision to just 80,000 for March’s NFP eliminating any remaining optimism that the Fed might have still raised rates in June.
COMMODITIES
After benefitting from the NFP reiterating that the Federal Reserve will adopt a slow approach to normalising monetary policy, Gold is looking slightly more bearish. The latest US Retail Sales is released on Wednesday and if we continue to encounter no correlation between substantially improved job creation and consumer confidence transitioning into expenditure, Gold will likely benefit because this would just provide another reason for the Federal Reserve to remain cautious on interest rate policy.
WTI Oil has continued to slip below $60 after a surprising advance to a 2015 high at $62.56 a few days ago. Although we are now encountering a correlation between declining oil rigs and lower inventories being announced, there remains an aggressive oversupply in the markets and traders may have decided to close positions.
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