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Market Wrap – July 2019




Throughout July, the trade talks (or lack thereof) between the United States and China have taken a back seat as a leadership change in the United Kingdom along with its looming Brexit deadline have been a focus, as well as ongoing concerns about global growth and the U.S. Federal Reserve’s first rate cut since 2008.  The International Monetary Fund (IMF) trimmed its forecast for global economic growth again thanks to trade wars, inflation concerns and Brexit. “Risks to the forecast are mainly to the downside,” the IMF said. “They include further trade and technology tensions that dent sentiment and slow investment; a protracted increase in risk aversion that exposes the financial vulnerabilities continuing to accumulate after years of low interest rates.  Mounting disinflationary pressures that increase debt service difficulties, constrain monetary policy space to counter downturns, and make adverse shocks more persistent than normal.”


During the month of July, the EURUSD has only headed in one direction and that is down as it finished the month trading at a two-year low below 1.11.  It had been enjoying some solid support from the key 1.12 level again after rallying and trying to push through the other key level of 1.13, although the 1.12 level may now be another layer of resistance the EURUSD has to work through if it is to rally in the near future.  This was a contrast from June which saw it enjoy a solid surge higher from support at 1.12 back to the 1.13 level before breaking higher and reaching a three month low just above 1.14, although it reversed quickly and fell strongly back to the key 1.13 level before drifting lower and testing the support at 1.12.


According to data from the European Union’s statistics office, Euro zone economic growth halved in the April-June quarter and inflation slowed sharply in July even though the unemployment rate fell to its lowest in 11 years.  An estimate of gross domestic product growth in the EZ showed the economy expanded 0.2% quarter-on-quarter, down from 0.4% in the previous three months, as expected by economists. Year-on-year, EZ GDP growth was 1.1%, down from the 1.2% in the January - March quarter.  On the back of the slowing inflation rate, market expectations are likely to strengthen that the European Central Bank (ECB) will further loosen monetary policy in September, as whilst it wants to keep inflation a little closer to 2% than current readings.  


Like the EURUSD, the GBPUSD has experienced a July it would rather forget as it has declined strongly moving to its lowest levels in more than two years.   In the final week of the month the sterling fell most strongly breaking through any short-term support at 1.24 down to 1.21. It was only a few weeks ago that the GBPUSD eased lower after falling through the key 1.27 level after reaching a one month high near 1.28 before falling away.  It dropped to its lowest level in more than two years below 1.24, however it was then bought up quickly, rallying up to above 1.2550 before the drastic drop to finish the month. The sterling has been attracted to the 1.27 level for the last two months as the GBPUSD has been content to trade very little and consolidate right around this level, however this now seems some distance away.  


Mr Boris Johnson has now become the new British PM.   One MP described the appointment as a "summer's day massacre" as the new PM installed his allies and Brexiteers in his new Cabinet.  At Number 10 Downing Street where he said, "Do not underestimate this country, " adding that Britons needed to cast off their self-doubt.  "The people who bet against Britain are going to lose their shirts because we are going to restore trust in our democracy, and we are going to fulfil the repeated promises of parliament to the people and come out of the EU on October 31, no ifs or buts", he said.  The United Kingdom remains divided over its divorce from the EU, and Mr Johnson’s strategy sets the UK up for a showdown with the EU. One of the issues that prevented Ms May from getting a divorce deal through Parliament was the Irish "backstop", which provided a customs union with the EU and Northern Ireland if no better solution was found.  


The AUDUSD has experienced a reasonably volatile July moving up as high as a three-month high near 0.71 down to a 2019 low to finish the month below 0.6850.  In the last week of July, the AUDUSD fell sharply from above 0.7050 down to the support level at 0.6850 before dropping lower. It was only two weeks earlier that the AUDUSD surged strongly back up to the current key level of 0.7050 as it then looked poised to threaten this level and possibly move higher.  Two weeks earlier it tested the level as it reached a seven-week high on the back of a steady climb higher over three weeks as it moved from support at 0.6850. This level has helped prop up the currency pair twice in the last two months however was tested again at the end of the month.  


In the first week of July, the Reserve Bank of Australia (RBA) delivered the first back-to-back interest rate cut since 2012 and set a new record low cash rate of 1% as it continues to try and ignite economic growth.  However, since that time the RBA have indicated that interest rates would remain low for "an extended period" and the market began pricing in expectations of further cuts to the RBA's already record-low cash rate. "If demand growth is not sufficient, the board is prepared to provide additional support by easing monetary policy further," RBA Governor Lowe said.  "However, as I have discussed on other occasions, other arms of public policy could also play a role in this scenario."  


Up until the last two days of the month, US equities had been enjoying another strong month of gains in July as the U.S. index reached an all-time high.  In the few weeks leading up the recent drop, the US30 index had remained close to its all-time high set mid-July, after it surged higher in June. Several weeks ago, the index consolidated a little in a narrow range roughly between 26500 and 26900, and it has used that period of consolidating to great effect pushing higher to the new highs. However, the index has now returned to that consolidation range where it may take a breather and reassess its next move.  


The U.S. Federal Reserve (Fed) has lowered interest rates for the first time since 2008 as they attempt to decrease the change of an ongoing economic downturn.  The Federal Open Market Committee (FOMC), led by Fed Chairman Jerome Powell voted 8-2 in favour of a small cut in the federal funds rate, and recommitted to their promise to "act as appropriate" to sustain the country's longest economic expansion in history.  The rate cut follows significant pressure from U.S. President Donald Trump. The U.S. central bank is hoping that this rate cut will be the necessary tool to keep the U.S. economy healthy. Chairman Powell made it clear that this cut isn’t necessarily the first of many: “Let me be clear: What I said was it’s not the beginning of a long series of rate cuts,” Powell said. “I didn’t say it’s just one or anything like that. When you think about rate-cutting cycles, they go on for a long time and the committee’s not seeing that. Not seeing us in that place. You would do that if you saw real economic weakness and you thought that the federal funds rate needed to be cut a lot. That’s not what we’re seeing.”


Gold has enjoyed a stable July as it has spent most of the month resting on support at the now key $1400 level.  Two weeks ago, gold surged higher off support at $1400 to a new six year high near $1450 before slowly easing lower since that time.  It has been well supported by the $1400 level for the last six weeks or so, and any time it has moved lower, it has been quickly bought up and supported, pushing it back above this level.  In the second half of June, gold enjoyed a strong surge higher through resistance at the $1350 level, which had been repelling prices despite multiple rallies to push through that level, after having provided stiff resistance to gold on numerous occasions in the last couple of years.  The $1350 level is now likely to offer support to gold should it decline from its current levels.  


Gold has been enjoying support from likely Fed moves and ongoing concerns over the global economy, including United States - China trade negotiations.  In the last week of the month the Federal Open Market Committee (FOMC) voted 8-2 to lower the benchmark rate in a target range of 2% to 2.25%. Fed Chairman Powell hinted that the rate cut could be a one-off.  "We are thinking of it as a mid-cycle adjustment to policy," Powell said. "I'm contrasting it with the beginning of a lengthy cutting cycle." He clarified his comments later stating that the Fed could cut rates again soon, but the cycle of cuts wouldn't last for a long period of time.  "What I said was it's not the beginning of a long series of rate cuts," Powell said. "We'll be taking a somewhat more accommodative stance over time." Many analysts agree that if the trade negotiations turn positive and economic data, especially inflation, improve in the near future, July's cut could easily be its only move this year.  

UK Oil

Like gold, oil has been well supported by a key level during July, in this case the $63 level.  Mid-July UK Oil fell sharply back to the key $63 level before rallying up again and now seems to content to sit on this level.  Three weeks ago, it met stiff resistance at $68 which has suppressed prices for the last two months. Over the last month or so it has slowly moved higher from a three-month low below $60.  In the last month or so oil has enjoyed some support from the $63 level and this support may allow it to consolidate here and then potentially threaten the next significant level of $68. In early June, oil did well to consolidate by trading in a narrow range roughly between $60 and $63, after falling sharply in the few weeks before.


Rising tensions in the middle east and the world’s most important oil chokepoint doesn’t have everyone concerned about oil prices.  Some would argue that it will lead to a sustained jump in oil prices, however Morgan Stanley is not convinced. They expect non-OPEC supply growth to keep crude futures relatively subdued over the coming months.  Morgan Stanley’s global oil strategist Martijn Rats, told CNBC that he isn’t overly concerned about possible supply disruptions in the wake of intensifying geopolitical tensions in the Middle East. “The history of fear around the Strait of Hormuz suggests that from time to time, this concern can flare up and we can have some disruptions but they rarely last for very long.  There is a difference in the oil market this time around because non-OPEC is simply growing so fast. That is the real game changer and that’s why the price action is relatively benign.”  


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