US Dollar Rebounds Amidst Geopolitical Tensions.
USD: Following another week of gains for Cable, a return of strength to the US dollar has seen the pair fall around 100-pips toward the 1.2600 mark. Escalating tensions in the middle east over the weekend and at the start of the week has reignited demand for the US Dollar. This came about as Houthi rebel out of Yemen attacked 3 commercial vessels over the weekend with the US responding by shooting down some drones. The tension continues to simmer and there is concern that one wrong move by either side could spark a wider conflict in the region which could have a massive impact on the global economy. It will be intriguing to see the developments for the rest of the week and whether high impact US data will drive markets later this week or be overshadowed by the Geopolitical risks in play. Today brings BRC retail sales data from the UK as well as S&P Global Services PMI before attention turns to the US session. The biggest data release will be the ISM Services PMI number from the US with policymakers remaining concerned about robustness of the US Service sector and it role in the fight against inflation. A significant drop and miss of the forecasted figure could see expectations for rate cuts increase once more and weakness return to the US Dollar. This will also depend on the market mood and sentiment and whether the demand for safe havens remain strong.
EUR: The Euro has come under pressure and has depreciated against a number of major FX currencies. The European outlook is fraught with difficulties as the global growth slowdown has had a major impact across the bloc, including Germany, Europe’s largest economy. EUR/USD has traded lower since the swing high last week Wednesday and has approached a zone of support. The zone comprises of the 200-day simple moving average (SMA) and the 1.0831 level of support. The pair may trade in a choppier fashion this week as US jobs data trickles in ahead of the major NFP print on Friday. The RSI suggests that further bearish momentum may have further to run as the current downward move is far from oversold territory. However, a close below the 200 SMA with considerable momentum is favourable from a bearish perspective given the potential for the 200 SMA to halt price declines.
GBP: GBPUSD continues to struggle hovering around the 1.2600 handle as mixed technical and a strong USD weigh on Cable. A return of safe haven demand as the week began has benefitted the US Dollar and the Dollar Index with a host of key data releases in the week ahead. The British Pound (GBP), on the other hand, is underpinned by diminishing odds for an early rate cut by the Bank of England (BoE). In fact, BoE Governor Andrew Bailey recently warned that it was too early to declare victory over inflation and predicted that monetary policy will have to stay restrictive for quite some time to make sure that inflation gets back to the 2% target. This further contributes to the GBP/USD pair’s uptick. That said, a softer risk tone is seen lending some support to the safe-haven Greenback and holding back traders from placing aggressive directional bets. Investors also seem reluctant and prefer to wait on the sidelines ahead of this week’s important US macro data, starting with the release of the ISM Services PMI later during the early North American session. The focus, however, will remain on the key US NFP report on Friday. Nevertheless, the aforementioned fundamental backdrop seems tilted in favour of bullish traders and suggests that the path of least resistance for the GBP/USD pair is to the upside. However, it will still be prudent to wait for a sustained move beyond the 1.2725-1.2730 supply zone, or the top end of a short-term trading range, before positioning for any further appreciating move ahead of the final UK Services PMI print.