Financial market research and analysis

Asian shares were broadly lower overnight, as softer Chinese iron ore prices weighed on the miners.  Chinese iron ore futures were 2% lower, as stockpiles at Chinese ports jumped to their highest level in over 13 years. US stock markets were closed for Martin Luther King Day.

Is the demise of the dollar pausing?

The demise of the dollar continued to be a central focus for traders as the greenback closed down for a fifth straight session on overnight. The dollar index has shed 11% since January 2017 and 3% in the past 30 days alone. There was no new fundamental data to spur on Monday’s selloff, which was a continuation of Friday’s flow to Europe. Whilst the US economic calendar is quiet once again on Tuesday, the dollar index has picked itself off 3-year lows.

The weaker dollar provided a boost to commodity prices, which have rallied strongly in conjunction with the exaggerated decline of the dollar. A weaker dollar makes dollar denominated commodities cheaper for buyers with other currencies, which is fuelling the recent rise of commodities.

Brent Closes Above $70, slips lower early Tuesday

Brent crude closed above $70 per barrel for the first time in 3 ½ years overnight, helped by the weaker dollar and signs of the oil production cuts are tightening supplies. Yet despite the high price of the black stuff, OPEC is holding its resolve by saying that it will stick with these oil production cuts until the end of the year. However, doubts could start to creep in as to whether the smaller nations in the production cut agreement, will continue to stick so rigidly to the agreed levels.

The other big cause for concern will be whether US shale production ramps up a gear in response to the higher oil prices, potentially flooding the market and bringing the price back down. Interestingly, so far, the response of US shale producers hasn’t been a quick as we might have expected, which has enabled the price of oil to climb. The price of oil appears to be comfortable at these levels, a move higher could knock the balance, boosting US shale production and actually initiate a move lower.

Overnight energy stocks have been putting in strong performances across Asia. However, with the uptick in the price of the dollar, oil prices are easing back marginally, albeit still above $70. Should Brent mange to hold this price we could see a strong start to oil majors and the energy sector in Europe on Tuesday.

Pound slips below $1.38, UK CPI moves into focus

The pound is capitalising on the weaker dollar, as it extended its gains versus the greenback once more in the previous session. Whilst reports of Spanish and Dutch finance ministers supporting a soft Brexit boosted the pound at the end of last week. Meanwhile, concerns of a tougher stance from the EU over transition talks is holding sterling back in early trade on Tuesday.

After a quiet start to the UK economic calendar this week, today sees market attention switch firmly back to economic releases. Inflation data, as measured by the consumer price index (CPI) could set the tone for the pound for the coming sessions. CPI is expected to dip in December to 3% from 3.1% in November. Core CPI, which strips out more volatile items such as food and fuel, is also expected to have ticked lower to 2.6% in December from 2.7% in November. Inflation continues to be a big issue and continued elevated readings could force the Bank of England to act against its will. A higher than forecast inflation number could see GBP/USD charge higher. Immediate resistance can be seen at $1.3835 (Feb ’16 low), above which there is very little in the way to $1.40.

Euro at 3 year high as ECB’s Hannson points to September to end bond buying programme

Sticking with the currency markets the euro is also trading at a 3-year high. The common currency has soared as a string of events have aligned, boosting the euro’s appeal. The most recent of these events being comments by ECB official Hannson, who said that the ECB bond buying programme could be concluded in September. The euro closed 0.6% higher versus the dollar on the news.

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