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Opinion

Markets Cautious Ahead of Holiday-Shortened Week

By Lukman Otunuga, Senior Research Analyst at FXTM

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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