By Lukman Otunuga, Senior Research Analyst at FXTM
More than $1 trillion was wiped out from stock markets on Monday as coronavirus cases spiked outside of China, fanning fears around the prospects of a pandemic and slowing global growth.
Equities in Asia and Europe flashed bright red, while Wall Street collapsed like a house of cards with the Dow Jones tumbling more than 1000 points, its third worst drop in history. The coronavirus outbreak is fuelling panic across financial markets, with negative sentiment being reflected in a surge in risk aversion, and an explosion in demand for safe haven instruments like Gold, the Japanese Yen and King Dollar.
The mood is slightly better Tuesday morning with US and European stock futures rising, but caution still lingers in the air. Asian stocks are struggling to nurse the heavy wounds inflicted from Monday’s brutal sell-off and this negativity could impact European markets.
Speculation around central banks coming to the rescue with a burst of new stimulus may cushion downside losses and rekindle appetite for riskier assets. However, with the coronavirus infecting over 80,000 people and spreading through populations far from its origin in China, uncertainty still remains a dominant theme with markets on high alert.
Dollar softens on rising rate cut expectations
Elsewhere, the Dollar slightly weakened against a basket of major currencies on Tuesday as coronavirus fears fuelled speculation around the Federal Reserve cutting interest rates.
According to the CME’s Fed Watch tool, there is a 45% probability of a US interest rate cut by April and investors are pricing in nearly three cuts over the next 12 months. The prospects of lower interest rates could impact buying sentiment towards the Dollar, despite it’s safe-haven status.
Investors will direct their attention towards the Conference Board consumer confidence report scheduled for release later Tuesday. A report that meets or exceed expectations could provide a boost to the Greenback which has appreciated against every G10 currency month-to-date.
Focusing on the technical picture, the Dollar Index is trading around 99.24. A break below 99.00 could encourage a decline back towards 98.70. However, if 99.00 proves to be reliable support, prices could rebound towards 99.50.
Commodity spotlight – Gold
Gold weakened on Tuesday after exploding to a fresh 7-year high above $1685 in the previous session, as coronavirus fears sent investors rushing to safe-haven assets.
Nevertheless, the precious metal is heavily bullish on the daily charts as there have been consistently higher highs and higher lows. A solid daily close above $1660 should seal the deal for a move towards the psychological $1700 level. If Gold bulls run of steam and prices remain below $1660, the next level of support will be around $1620.
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