Gold Prices Hover Near Key Support As DXY Index Stays Elevated

The US Dollar (via the DXY Index) is pointing higher once again, turning the session’s earlier losses into a modest gain ahead of the cash equity open in New York. Even as the US government shutdown churns into day 33, “no news is [still] good news” as the flow of weak US economic data has been stemmed. As such, FX markets continue to take cues mainly from Europe – Brexit negotiations, ECB meeting tomorrow, and now, the World Economic Forum in Davos – and Asia – the state of the US-China trade war détente.

BIG DAY TOMORROW FOR THE EURO: PMIS AND ECB ON THURSDAY

Thursday brings forth the preliminary January PMIs ahead of the European Central Bank rate decision, both of which should prove consequential to the Euro (which has been sidelined by a lack of data on Wednesday). In terms of the data, the preliminary January Eurozone Composite PMI is due in at 51.4 from 51.1, a modest improvement but nothing that should inspire much confidence.

In terms of the ECB meeting, it’s best to put the rate decision in the context of recent price developments. Inflation expectations have been destabilized over the past few months, but the trend is especially pronounced over the past year: the 5-year, 5-year inflation swap forwards peaked in January 2018 at 1.774%; they finished last week at 1.553%. With the final December Eurozone CPI report showing topline inflation of +1.6% y/y, it’s difficult to think that ECB President Draghi and the Governing Council will be of the mindset that their four criteria for ending their ultra-loose monetary policy will be met. In particular, reality has disappointed the expectation that “inflation will be durable and stabilize around those levels with sufficient confidence.”

Whereas ECB President Draghi has previously suggested that a rate hike could materialize sometime around “summer 2019,” there is ample evidence to suggest that this event horizon will be pushed back by a few months. It seems doubtful that the Governing Council would want to make any prognostications beyond the end of this calendar year, it still being the first month of 2019 but also due to the fact that Draghi’s term expires in October. The ECB may very well keep a rate hike for 2019 on the table – for now.

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