“Risk-on” was the name of the game during Monday’s trading session, with world stocks marching into unchartered territory as tensions eased on the Korean peninsula.
Most Asian indexes received further support from easing geopolitical tensions during early trading on Tuesday, and European equities are likely to benefit from renewed risk appetite. The financial market stole the spotlight on Monday, as both the S&P 500 Index and Dow Jones Industrial Average sprinted to record levels ahead of the Federal Reserve meeting that is due later today. The combination of resilient oil prices, rising optimism over the global economy and receding geopolitical tensions are likely to excite equity bulls - consequently fuelling the stock market rally.
BoE’s Carney strikes again
Market players instinctively offloaded the British Pound on Monday, following the Bank of England Governor Mark Carney’s comment that any future interest rate hike would be limited and gradual.
Carney’s statement that a rate increase could be “at a gradual pace and to a limited extent” felt like a diluted version of the central bank’s hawkish message last week, with a touch of caution added. Although Sterling managed to rebound from the 1.3500 level this morning, the skepticism over the Bank of England actually raising UK interest rates this year could create some headwinds for bulls further down the road. As actions speak louder than words, there is a threat that Sterling will find itself exposed to downside shocks, if the BoE fails to raise rates this year.
Investors will be watching to see if the central bank raises interest rates in an effort to tame inflation, or whether it will be forced to remain on standby amid the Brexit uncertainty.
From a technical standpoint, the GBPUSD remains healthily bullish on the daily charts. The weekly close above 1.3500 should encourage a further appreciation towards 1.3700. In an alternative scenario, sustained weakness below 1.3500, is likely to trigger a technical correction lower towards 1.3350.
Dollar wobbles ahead of FOMC meeting
The Dollar struggled to maintain gains against a basket of major currencies on Tuesday morning, as market players positioned for September’s FOMC meeting, which could offer clues on future monetary policy.
While the central bank is widely expected to keep interest rates unchanged, investors will be paying very close attention to any details on when the Fed plans to shrink its mammoth $4.5 trillion balance sheet. With investors still re-evaluating the Federal Reserve’s ability to raise US interest rates in December, attention will be directed towards Janet Yellen and her thoughts on the recent inflation trends in the U.S. A hawkish Yellen, who leaves the door open for another rate hike before year-end, is likely to offer the Dollar a lifeline.
The Dollar Index remains bearish on the daily charts. Repeated weakness below 91.50 should encourage a further depreciation towards 91.00.
Commodity spotlight – Gold
Gold was under intense selling pressure on Monday, as the risk-on mood encouraged investors to offload safe-haven assets. Stabilizing oil prices and easing North Korean tensions have both played a leading role in Gold’s sharp decline, which was trading around $1308 as of writing. This tug of war between bulls and bears seems to be coming to an end, with a break below $1300 simply handing control over to sellers.
From a technical standpoint, a breakdown below the tough $1300 support should encourage a further decline towards $1280. In an alternative scenario, if $1300 defends, then the price could bounce back towards $1315.