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European update – Earnings, Fed, Gold, UK, Oil

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No summer lull just yet

We may have entered into summer holiday territory but this week is going to be anything but a lull, with earnings, major data, a new UK Prime Minster and a central bank decision guaranteed to spice things up.

Source – Thomson Reuters Eikon

That said, Monday is unlikely to be a knockout, with only a few companies due to report and the data calendar looking equally bare. Instead, Monday may be a day for reflection on where we stand and preparation for what lies ahead. We’ve not been short of headlines recently which has kept investors on their toes.

Much of the attention recently has been on the Fed, with stock markets it seems heavily reliant on the central bank to cut interest rates multiple times this year. Bullard further attempted to pare back expectations for a 50 basis point cut next week, claiming he would like to cut by 25, adding that he sees no need for 50. Given that he’s among the most dovish policy makers and possible the most dovish voter on the FOMC currently, it’s surprising that a 50 basis point cut is still 20% priced in.

Is gold poised for a correction?

Attempts by the New York Fed to clarify John Williams’ comments late last week, combined with those made by Bullard on Friday, have successfully pared back expectations for a 50 basis point cut next week – although they still remain high – which in turn has helped the dollar rebound and pulled gold off its highs.

Gold broke above $1,450 last week for the first time in more than six years, following Williams’ initial comments. The question now is how much more is to be priced in and whether in the near-term, gold has had its fun. Longer term, the environment remains bullish for gold but a lot has now been priced in. $1,400 now looks a very interesting level to the downside, with recent highs obviously then notable above.

Gold Daily Chart

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GBP back in the red ahead of PM announcement

Sterling is once again in the red ahead of tomorrow’s expected announcement that Boris Johnson will replace Theresa May as Prime Minister. Johnson has been the considerable front-runner since day one and there is little doubt in most people’s minds that he will be declared the winner and new PM on Tuesday.

Given his views on Brexit and no-deal in particular, this has not been great news for the pound but with much of it now priced in, sterling may see some reprieve in the coming weeks. Although, the closer we get to 31 October, if no-deal looks likely, any gains may quickly unravel.

EURGBP Daily Chart

Further escalation in the gulf pushes oil higher

Oil prices are around 2% higher at the start of the week following another escalation in the Persian Gulf as the Iranian Revolutionary Guard seized a British-flagged tanker, an act clearly linked to the UK’s decision to seize a tanker carrying Iranian oil a couple of weeks ago. This is just the latest in a series of acts in recent weeks that have heightened tensions, primarily between the US and Iran, and raised the risk of a larger conflict.

So far, that has managed to be avoided, probably because neither side wants to be the one that dramatically escalates the situation but traders are clearly a little on edge due to the importance of the passage for global oil supplies. Oil prices haven’t risen too much yet but if the situation deteriorates further, we should possibly brace for higher prices.

Brent Daily Chart

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

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Craig Erlam

Craig Erlam

Former Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary.

His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News.

Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
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