Dollar holding firm on the back of Powell’s optimistic remarks, pound and gold remaining under pressure

Dollar holding firm on the back of Powell’s optimistic remarks, pound and gold remaining under pressure

Posted on Thursday, July 19 2018 at 2:39 pm GMT+0000

Dollar holding firm on the back of Powell’s optimistic remarks

The dollar rose yesterday on the back of Jerome Powell’s optimistic remarks on the US economy. Dollar’s strength drove commodities and most of the other currencies in addition to bonds lower, while the stock markets recorded new highs, especially European indices.

If we focus on Powell’s speech, we notice that he did not give any new indications. Despite his optimism, he was largely ambiguous and did not signal any important hints regarding the future of the monetary policy. He focused on the Fed continuing to gradually raise interest rates.

The most important of that in my opinion was the positive reaction of the market amid a lack of escalation in trade tensions. As long as the trade war continues to remain only between the United States and China and other countries do not expand to other countries, I expect that its negative repercussions, could somehow ease with the two countries resorting to alternative sources of import and export of products.

Focus will turn now towards corporate earnings, and in the coming weeks and months on the economic data and most significantly towards inflation data. Inflation is at its highest levels since 2012 and is expected to continue that surge. But it is important to keep in mind that if this rise is not accompanied by a rise in growth, the Fed may allow inflation to go beyond its price target of 2.0%, driving the Dollar to change its current path.


GBP remains under pressure amid Brexit-fueled political noise in the UK.

In fact, the United Kingdom is facing problems at the political and economic levels.

The Sterling dropped on Tuesday, after Carney expressed concerns amid Brexit-fueled political noise in the UK.

Yesterday, disappointing UK inflation figures fueled the GBP’s decline. Of course, slowing inflation and uncertainty are weakening the prospects for a BoE interest rate hike in the coming period.

Technically, the drop below the 1.3050 support opened the way for a move towards 1.2950 and then 1.2870, but in the coming period focus should turn towards the political developments, as the economic situation is not as bad as some might think. Unemployment is at 4%, its lowest levels since 1975, productivity is growing at the fastest pace in 6 years, factory orders are the fastest in four years, wage growth accelerated to two years highs, and GDP is expected to rise beyond 1.5 in the next year.

So any positive Brexit-developments could push the cable back up again.


Gold suffering on the back of the US currency’s strength

After stabilizing at $1235, gold returned to the downside after Powell’s testimony, which refueled risk appetite and prompted investors to invest in stocks and the dollar again.

But overall, gold has started its decline earlier in April suffering from the surge of the dollar index and bonds yields. This rise was due to the acceleration of the Fed’s rate hike path. As interest rates rises, the bonds yields rises, decreasing gold’s attractiveness.

On another side, the absence of any worrisome developments on the trade front undermining demand on gold. However, despite the current weakness, I do not expect a price collapse. Gold is testing a support area at $1220, and breaking this area could lead to a retest of $1210 which can act as a significant support. Any escalating trade tensions or disappointing corporate earnings in may lift gold prices to the upside.