S&P 500, EURUSD - more volatility & stronger dollar ahead.

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  • Dovish tone of world CBs (BOC, BOJ, Riksbank, etc) this week is a dangerous sign for risky assets, reminds of 4Q18 volatility. 
  • We can see «green shoots» in the US and China but outside these countries the economic picture is getting more and more complicated or even worsening.
  • Market is focusing on FOMC meeting May 1 and whether the Fed will blink. EURUSD – 1.10, DXY 100?  
Something goes wrong in the global economy these days as several world central bank (Bank of Canada, Bank of Japan, Riksbank, etc) softened its tone further, turned dovish or cut GDP estimates for 2019. We’ve also seen weak inflation numbers in Australia (23.04) fueling speculation about possible rate cut during 2Q19, a bunch of disappointing data in European region (23.04  Eurozone Consumer Sentiment Index, 24.04 German IFO Business Climate Index) meaning dovish ECB in June (6.06).

If in March or earlier this year a U-turn in monetary policy or dovish tone of world CBs could be seen as a fuel for the recovery of risky assets and world equities after volatile 4Q18, then now further softening of the rhetoric fr om Central Banks can mean more uncertainty and weakness in the world economy or simply reminds of late stage of the business cycle.

In fact, there are «green shoots» in the US and China wh ere macro data has improved significantly recently and cooled investors’ concern over a potential economic slowdown but outside these countries the economic picture is getting more and more complicated or uncertain.   

By the end of the day we can see the return of volatility seen during 4Q18 in world financial markets, higher chances for «Sell in May and Go Away» or possible profit taking for S&P 500 (3%-5% correction in May). Under such environment gold prices can get additional support with targets at $1300/05 and $1320/25 in May and June.

The dollar can benefit either from the worsening risk appetite as a safe haven currency or from comparative strength of the US economy over the European region or emerging economies.  Although our target for EURUSD of 1.1100/30 for 2Q19 was achieved on Friday the we see the pair staying subdued into May and June with potential drop to 1.10 (a rise towards 100 for the dollar index).

Meanwhile short-term the main question whether the Fed will blink during FOMC meeting on May 1 and join other central banks with cautious tone. Under such scenario the greenback is vulnerably to profit taking with the recovery of EURUSD towards 1.1200/15, 1.1250 (the correction can be seen as a selling opportunity). But if the Fed doesn’t soften the tone or express concern for global economy next week, then the dollar’s strength to last a bit longer. The risk is that market participants can start selling the EURUSD with targets at 1.10 on rumors the ECB will reinforce its dovish tone on meeting June 6. 

EURUSD (daily)

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