Equity and forex relationship matter
Dollar index facing major turbulance
Trump to speak in Davos
Today is not the 3D day but 4D. The letter ‘D’ matters for traders; Donald Trump, Davos, Dollar and Economic Data. The World Economic Forum in Davos comes to an end, Donald Trump will speak in Davos, Dollar index would be under the spotlight after a massive rollercoaster ride yesterday and the UK’s Prelim GDP Data will be released which would impact sterling and the FTSE index.
The relationship which is prominent in the markets is that when a currency picks up some steam, the equity index of that country loses esteem among investors. The strength in the Sterling is matched by the weakness in the FTSE index which touched the lowest level YTD yesterday. The Euro erupted to the upside and this capped the gains for the European stocks.
The dollar index experienced massive turbulence yesterday. Perhaps, the US Treasury Secretary wasn’t on the same page as President Donald Trump. One was saying that the lower dollar is good for the economy and other was trying to sway the markets that the dollar is going to become stronger and stronger. The dilemma created by both brought enormous volatility for the dollar index and currencies such as the Euro and Sterling experienced mammoth moves. The dollar index is on track for its worst monthly performance since March 2016.
The Euro by any measure is highly undervalued in our view and the weakness in the dollar index isn’t the only reason that we have seen it surpassing the 1.25 mark yesterday. The European Central Bank policy members failed to show united front and investors saw that there aren’t many reasons going to stop the ECB from increasing the interest rate next year. We think one interest rate hike is surely on the cards before mid-2019. We think that the Euro would continue to move higher and the next major resistance is sitting at 1.27 against the dollar.
Sterling is in a better position in hopes that Theresa May has survived the most difficult part and the European partners are striking a more favourable tone in relation to develop a new deal.
Mr Trump’s speech in Davos is going to be the highlight of the day, he wants to talk about tax, America first and what he thinks a fair deal. However other leaders are less enthusiastic towards his speech. Investors would like to know if the Cold War has already started which triggered by Mr Trump who inflated the import duties and tariffs.There could be some significant headlines on the relationship between the two countries (UK and US) which preferred antiglobalisation. His views on Pacific trade deal could also generate some flashing newswires. Overall, we think the event would create more volatility and it would be across the equity and forex markets.
As for the precious metal, the dollar strength is fading again and the precious metal is set for another weekly gain. The dollar may remain under pressure due to the policies which Mr Trump has adopted and this plague could drag the dollar index lower. Improving fundamental over in Europe and the Chinese Lunar year should keep the gold price rising. It is more than likely that we may see a test of the $1400 mark next week. Gold having its best month since February 2017.
