3 Markets to watch this week
BY Janne Muta
|April 2, 2024EURUSD
The Fed's strategy to hold rates steady, amidst a stronger-than-expected US economy, has pressured the EUR while the USD has been rallying. The ECB's caution in the face of less favourable economic signals than in the US might limit the EUR's attractiveness in the medium term. This contrast, rooted in the US's robust job market and consumer confidence versus the EU's cautious recovery and inflation management could lead to further strengthening of USD against the EUR. This reflects broader economic resilience in the US compared to a more fragile outlook in the EU.
In the US, a robust job market and high consumer confidence showcase economic resilience, with notable employment growth and a stable trade balance, despite concerns around manufacturing and energy sector volatility. Inflation remains a challenge but is counterbalanced by the economy's overall strength.
The EU, on the other hand, shows cautious optimism with slight improvements in manufacturing and services sectors, alongside persistent inflationary pressures and a slowly recovering labour market. Retail sales dip and stagnant GDP growth signal consumer hesitancy and a fragile economic recovery. However, an improved trade balance and the European Central Bank's prudent monetary policy indicate efforts towards fostering growth and controlling inflation.
EURUSD is trading in a bearish trend channel after creating a lower reactionary high at 1.0946. The lower reactionary high and weakness in the weekly chart suggest that the 1.0695 level could be penetrated. Below this support, a move to 1.0655 could be likely while the bear channel low is currently at 1.0593. Alternatively, if the 1.0695 level attracts buyers, look for a move to 1.0750 and then possibly to 1.0800 on extension.
Gold
The gold market remains robust primarily due to expectations of a Federal Reserve interest rate cut in June, buoyed by moderated US inflation data and the potential for lower rates enhancing gold's appeal as a non-yielding asset. Despite temporary pressures from a stronger US dollar and rising bond yields, gold's price has surged, hitting record highs in multiple currencies, underscoring its enduring strength as an investment amidst economic uncertainties.
Amidst escalating global tensions, including the Israel-Hamas conflict, aggression in Yemen, the ongoing war in Ukraine, and concerns over Taiwan, investors are gravitating towards safe havens, notably gold and the US dollar, driving their values higher simultaneously. This unusual correlation reflects deepening geopolitical uncertainties and the perceived resilience of the US economy relative to global counterparts.
Additionally, expectations of the Federal Reserve cutting interest rates three times this year add a layer of complexity. While rate cuts typically weaken the dollar by reducing its yield appeal, the current geopolitical strife and the dollar's status as a safe haven are sustaining its strength. Concurrently, these rate adjustments bolster gold's allure as a hedge against potential inflation, showcasing a strategic pivot in investment preferences towards security and stability amidst global unrest.
The gold market is in a weekly and daily uptrend and has recently broken out of a sideways range. Other bullish indications such as the market trading well above the upward pointing fast SMA(20) suggest there could be more upside ahead. The nearest key support area at 2,222 - 2,228 might attract buyers should the market re-test it. Alternatively, if the area doesn't hold, look for a move down to the 2,195 - 2,202 range.
DJIA
Yesterday’s manufacturing data, particularly the ISM Manufacturing PMI for the US, which rose to 50.3 against a forecast of 48.5 from a previous 47.8, suggests a slight rebound in manufacturing activity, crossing back into expansion territory. This improvement, however, was not received positively by the stock markets. The negative market reaction could be attributed to concerns that stronger economic data might reduce the urgency for the Federal Reserve to cut interest rates.
The Federal Reserve's rate decisions are closely tied to economic performance indicators. The hint at three rate cuts might have initially buoyed the stock market by lowering the cost of borrowing and potentially increasing spending and investment. However, the improvement in manufacturing might suggest to investors that the economy is not slowing down as much as feared, potentially leading the Fed to reconsider or delay the anticipated rate cuts.
The US30 CFD that tracks the Dow Jones Industrial Average (DJIA) is ranging after it failed to attract buying above a swing high at 39,894. Now the market is trading relatively close to the lower end of this range and some key support levels (39,228 and 39,276). Therefore, if the market could be nearing levels where the bulls might re-engage with the market again, alternatively, if this area is violated decisively we might see the market moving down to 38,998 and then perhaps further to 38,820. In the case of the market rallying higher, look for a move to 39,760.
This week's key data releases, including JOLTs Job Openings, Factory Orders, and particularly Non-Farm Payrolls, will further shape expectations around the Federal Reserve's monetary policy. A stronger job market, as indicated by higher-than-expected Non-Farm Payrolls and stable unemployment rates, could further dampen immediate expectations for rate cuts, as the Fed might prioritize combating inflation over stimulating the economy in the face of solid employment figures.
On the other hand, speeches from Federal Reserve officials throughout the week could provide more clarity or signal a commitment to easing despite short-term improvements in certain economic indicators. Investors and traders will be parsing these communications closely for any hints on the direction of monetary policy.
How will you trade the markets this week?
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Janne Muta holds an M.Sc in finance and has over 20 years experience in analysing and trading the financial markets.
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