Asian shares turned mixed on
Monday while US equity futures slipped despite Wall Street ending Friday on a
strong note. Investors seem to have entered the holiday-shortened week in a
cautious mood, ahead of key economic releases, President Biden’s infrastructure
spending plans and the monthly US non-farm payrolls report. Nevertheless, the
overall mood across financial markets remains positive thanks to the success of
vaccine rollouts in the US and UK with the growing optimism around a global
economic recovery continuing to fuel the risk-on sentiment. This continues to
be reflected in equity markets, with the Dow and S&P 500 ending at all-time
highs last week.
Given how there is so much
confidence priced into markets, this could turn out to be a key week for equity
bulls. Should the pending data releases fail to meet expectations, the risk-on
sentiment could take a hit. Another negative theme to watch out for is the
rising coronavirus cases in Europe and renewed lockdown restrictions across the
continent. If things get even uglier in Europe with the outlook darkening,
risk-off may engulf financial markets.
Dollar poised to extend gains?
The dollar has entered the week
on a firm note, appreciating against every single G10 currency excluding the
Japanese yen. Enthusiasm over the US economic recovery and rising Treasury
yields have pushed investors towards the dollar’s safe embrace, while progress
on the vaccine front has sweetened appetite for the currency. Given how the
euro has been punished by spiking coronavirus cases in Europe and its faltering
vaccination campaign, this could push the Dollar Index higher – especially when
considering the euro’s weighing.
Looking at the technical picture,
the Dollar Index is bullish on the daily timeframe. Prices are trading back
above the 200-day moving average while the MACD is above 0. However, the
Relative Strength Index is slowly approaching overbought territory. Should
92.50 prove to be reliable support, the DXY could make a move on 93.20. This
technical setup is very much likely to be influenced by the US jobs data on
Friday.
Commodity spotlight – Gold
Gold ended last week lower
despite the concerning developments revolving around Covid-19 in Europe. Even
as the rally in bond yields took a breather, this offered little support to
zero-yielding gold. It is becoming clear that the mighty dollar is the culprit
behind gold’s decline. The encouraging developments on the vaccine front in the
US have fuelled hopes for a faster US economic recovery consequently boosting
appetite for the greenback. Should the dollar extend gains in the week ahead,
this is likely to drag gold prices lower.
Gold could still rebound if
Covid-related concerns from Europe fuel risk aversion. At this point, the
technicals favour the bears with a weekly close below $1730 sealing the deal
for a decline towards $1700 and the cycle lows.
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