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Dollar bounces; Europe on front foot

The dollar and the US indices have performed very differently over the past few months. Whilst the US dollar has fallen for the past 7 straight weeks, the US indices have hit record high after record high.

It is quite clear to see why the dollar has been so unloved, there have been numerous factors stacking up against it, not least the conflicting messages from the White House. Just last week the greenback had to endure increased concerns over trade wars and protectionism with Trump’s solar import tariff, US Treasury Secretary Steve Mnuchin’s comments of a weak dollar benefiting the US economy and softer data in the form of jobless claims, housing data and Q4 GDP. After digesting all of that, there was no way that the dollar was going to have a strong end to the week.

 

The dollar index sunk to a low of 88.6 at the end of last week, trading uncomfortably close to its 200 month SMA in the region of 88.25. However, the start of the new week has seen US Treasury yields extend their rally and buying interest picked up for the buck during the Asian session, producing a bounce in the dollar and pushing it back over 89.00 versus a basket of currencies

 

With little in the way of economic data from Europe this morning and no relevant releases from Asia overnight, we are seeing the fx markets track the dollar movement. The EUR/USD has set the week off on the back foot, hitting a low of $1.2385 overnight, thanks to the rising US treasury yields boosting the oversold dollar.

 

US Inflation to cement the buck’s bounce?

Investors will now look ahead to the release of US PCE figures, the Fed’s preferred measure of inflation. Month on month inflation is expected to have increased 0.2% in December, from 0.1%. Meanwhile, on a annualised basis a constant reading of 1.5% is forecast. Given the ongoing concerns at the Fed over the sluggish inflation in the US, a higher reading this afternoon, could help cement the dollar’s bounce.

 

Positive European open

European bourses are pointing to a positive start with futures lifted across the board, as they find support from weaker European currencies. The FTSE’s miners could receive a boost from a 1% rally in copper, although other metals such as gold and iron ore are seen slightly lower and oil is trading mixed heading to the open.

 

US to continue its impressive start to the year?

The S&P 500 has rallied over 7.5% so far this year, hitting 12 fresh all time highs on the way. If the “January effect” is to be believed, whereby the stock market’s performance in January sets the tone for the rest of the year, we are on track for a bumper year. So far investors confidence and belief in equities has been unwavering, pullbacks of any significance have been few and far between.

 

Look ahead

This week the US markets will remain sharply in focus as investors look to see whether the FOMC and US jobs data can lift the dollar and whether US reporting season, which shifts up a gear, will continue to push the US equity indices higher. The combination of FOMC, NFP and earnings could make for a volatile week.

Corporate earnings releases will come from 120 S&P stocks, including 10 Dow components. The list includes Facebook, Microsoft, Apple, Amazon, Alphabet and expectations are running high with anything up to around 18% increase in EPS expected.

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