The Euro made most of the headlines on Friday, after extending gains to a 2.5 year-high and approaching the 1.2 key psychological level. The single currency has appreciated more than 13.4% since the beginning of the year, and many traders were looking for a signal to cover their long Euro positions. However ECB President Mario Draghi didn’t provide this opportunity;failing to touch on the Euro’s recent display of strength at Jackson Hole, Mr. Draghi provided investors an opportunity to keep adding to long positions. On the other side, although Fed Chair Janet Yellen seemed optimistic about progress made to reach the full employment and inflation target of 2%, she didn’t give away any hints on interest rates or balance sheet reduction. This disappointed dollar bulls who needed further guidance on monetary policy.
U.S. Wage growth remains the missing ingredient
Investors have probably priced in a September “taper” by the ECB, but the big question remains - will the Euro manage to extend gains from current levels, or will it begin a short-term correction? I believe the answer lies in U.S. data this week. When looking at U.S. bonds behavior, spreads between 2-year and 10-year treasury bonds have been shrinking since 7 July and are currently standing at 0.83 basis points, which is not good news for the greenback. While the flattening yield curve may be partially explained by recent geopolitical tensions and a spike in equity market volatility, inflation expectations remain the key contributor. If inflation expectations remain low, the Fed will find it difficult to tighten monetary policy at the desired pace. That’s why U.S. wage growth is the most significant piece of data to watch on Friday.
The U.S. jobs report, due for release on Friday, will likely show a slowdown in job creation. Markets expect 180k jobs to be added to the U.S. economy in August, versus 209k in July and 231k in June. Despite the expected slowdown, the numbers still look healthy and the key focus remains on wage growth; this has been disappointing, with little growth shown over the past two years and remaining flat at 2.5% since April. Expectations are to see a 0.1% uptick for August, but for the yield curve to steepen and convince investors of a third rate hike in December, we need to see wages accelerating further.
With no tier-one economic data on the calendar and markets in U.K. closed today, Sterling traders are awaiting the results of a new round of talks between the U.K. and the E.U. So far, there are no signs of progress and differing opinions of Brexit Secretary David Davis and his E.U. equivalent Michel Barnier suggest there’s a lot to be done to bring both sides into an agreement. Although the pound seems oversold, it is likely to remain under some pressure until positive developments materialize.
Will Gold finally breach $1,300?
The yellow metal is trading slightly higher on Monday, and it seems gold bulls are trying another attempt to break above $1,300. Data from the Commodity Futures Trading Commission showed traders have continued to add long positions as yielding assets and are still providing very little to encourage investors. However, I think U.S. politics will play a significant role in gold’s next move. The debt ceiling and Nafta deal are amongst things to be watched closely. If gold gathers momentum and manages to close the week above $1,300, I believe we’ll be seeing another leg higher, with a potential to test 2016 highs, around $1,375.