Indices throughout the Asian session have shown downside pressures and this sentiment is likely to continue as a theme throughout both European and US trading today.
There are two reasons for the decline in stocks and this is a combination of the China GDP earlier this week falling to the lower range of Beijing’s target, which will hint towards China’s demand for global imports being lower, and the US Advance Retail Sales and Industrial Production numbers pointing out that the US economic sentiment is not as high as traders were previously pricing into the markets.
The pressures being noticed in indices could also transform into the currency markets if today’s high-risk inflation data from the United States eases back pressure on the Federal Reserve to begin raising interest rates. As repeatedly mentioned, the USD will be vulnerable to profit-taking as the second quarter of the year commences and we have already seen this as the NFP, Retail Sales and Industrial Production data has provided the Federal Reserve with every reason to be as cautious and as hesitant as it wants before raising US interest rates. I still do not think that we have pushed back expectations any further than September, but if the inflation data shows that the substantially higher-valued USD has finally caught up on prices, then we are probably looking at another round of USD profit-taking.
Due to both the EURUSD and GBPUSD upside potential being limited to USD weakness, both pairs are progressing to the upside as the Dollar weakens. The GBPUSD has advanced as high as 1.4969 but it is worth pointing out that this pair has found heavy resistance around 1.50 on multiple occasions throughout the past month, and it is likely going to require substantial USD weakness to push the pair above this trading range. Later today, the latest UK employment report is released and although consistently strong job creation has been a cornerstone of the UK economic recovery, I am keeping a firm eye on whether UK inflation pressures are weighing on wage growth. The UK election is also just around the corner and there will be a repeated risk of this quite suddenly weighing on investor sentiment.
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The EURUSD has touched 1.08 for the first time since early April following the slightly upbeat press conference from ECB President Mario Draghi two days ago. Although GDP growth forecasts are being revised to the upside, I remain apprehensive whether the recently improved economic data is due to the ECB’s continuous stimulus measures having the desired impact, or the dramatically weaker Euro lifting competitiveness and the decline in the price of oil acting as an extra stimulus tool in its own right as budgets are eased. I remain bearish on the Euro mainly because the ECB QE program is going to last until September 2016, which will make potential buyers think twice before considering purchasing the currency, while the ongoing Greece situation just presents a constant potential downside risk to the currency.
Following the weekly US Crude Inventories report coming in weaker than expected, the oil bulls have found motivation to push the price of WTI to a yearly high at $57.36. The weaker US Crude Inventories report coming in weaker than expected has led to optimism that the drop in US oil rigs that has been noticed since January is starting to impact production. However, I remain uneasy whether this is the case and it is worth pointing out that that not only are crude inventories in the United States continuing to increase, but the weaker report is coming after previous reports announced that US inventories were far beyond already-high expectations.
As far as I am concerned, the oversupply in the market is still heavily against the commodity and until there are clear indications that this issue is being resolved, I still think the oil markets will be at risk to continuous pullbacks.
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