Tuesday, 2 July 2019

RISK SENTIMENT CAUTIOUS AS TRADE TRUCE PAINTS ILLUSION OF MARKET STABILITY

Lukman Otunuga,
FXTM Research Analyst

Some semblance of stability returned to financial markets yesterday as investors breathed a collective sigh of relief after US-China trade talks during the G20 summit ended on a positive note over the weekend.

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Global sentiment brightened with “risk-on” making a return after the United States and China agreed to restart trade negotiations. A sense of optimism over both sides finding a middle ground on trade is likely to distract market players away from geopolitical risk factors. However, given how the implemented tariffs are denting global growth and still remain unresolved – nothing much has changed. With the underlying factors weighing on investor confidence still in play, this illusion of market stability may be tested as the second half of 2019 gets under way.

Dollar cheers US-China trade truce
The Dollar’s aggressive appreciation on Monday confirms that the currency remains extremely sensitive and reactive to speculation around a potential US interest rate cut this year.

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A trade truce between the United States and China is positive for global sentiment and removes some element of uncertainty over trade. The Federal Reserve is unlikely to pull the rate cut trigger as tensions ease between the two largest economies and this hesitance is good for King Dollar.

Looking at the technical picture, the Dollar Index is trading marginally above 96.70 as of writing. The upside momentum is likely to send prices towards 97.00 in the near term. Should market expectations continue cooling over the Fed cutting interest rates, the Dollar Index has the potential to blast through 97.00.

Reserve Bank of Australia cuts rates to historic low
The drum beat of central banks showing a willingness to ease monetary policy beat louder this morning after the Reserve Bank of Australia (RBA) cut interest rates to a fresh record low of 1% - down from 1.25% last month.

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This means that in the space of four weeks, interest rates in Australia have decreased from 1.5% to 1.0%. Should the rate cuts fail to revive household spending and stimulate economic growth, the RBA could pull the trigger once again this year.

In regards to the technical picture, the AUDUSD pushed higher despite the rate cut with prices trading around 0.6980. An intraday breakout above 0.7000 could open the doors towards 0.7030.

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