Euro, gold break higher as dollar snaps bullish trend

Morning Note

The euro rose to 18-month highs after EU leaders agreed their stimulus package and a broad risk rally saw the bulk of dollar crosses achieve long-awaited technical breakouts. EURUSD has broken out above 1.15, the key March swing high resistance, with the next target in sight for bulls at 1.1570, the January 2019 peak. Three consecutive daily gains show strong momentum with the bulls. The pair needs to hold onto this 1.15 to move up into the 1.1760 area around the long-term 38.2% Fibonacci retrace.

Elsewhere in FX markets, sterling rose to its best level in a month against the dollar, as the greenback came under pressure across the board. GBPUSD has cleared 1.27 but the rally lost near-term momentum around 1.2770, short of the Jun highs at 1.2810. The Aussie has also cleared some big levels and AUDUSD is looking to take out its Apr 2019 highs at 0.72 before it can consider the Nov 2018 peak at 0.74.

I don’t like to call the dollar top anything like as easily as many, but the dollar is set up to retrace some more of the last two years’ gains. The dollar index has broken down at two-year trend support which may call for further downside pressure to build, particularly now the EU has apparently got its house in order and the US needs to keep up. This morning we have seen USD push back a little – GBPUSD needs to hold yesterday’s low 1.2650 needs to hold for sterling bulls.

Gold has broken out to notch fresh nine-year highs at $1,865, bringing the $1,900 firmly into view as well as the all-time high around $1,921 becoming a real target. US 10yr Treasury yields drifted under 0.6% but are just about holding onto this level for now. Real rates continue to stretch out deeper into negative territory, with 10yr TIPS sliding to –0.87% and the whole curve falling. The way interest rates are looking combined with the macro backdrop and the threat of an inflation surge caused by the amount of aggressive monetary and fiscal stimulus, means gold may end the year at $2,000. Unless the inflation comes through though this may mark a medium-term top with real interest rates at the bottom of their multi-year range and without much room to extend further into negative territory. Two big, interconnected questions for gold bulls now – can 10yr TIPS break out to the downside and take out –1%, and does inflation come through in 2021 or even 2022 when the cycle picks up?

Oil broke out to finally close the gap to the March 6th level. WTI (Aug) rose above $42 but pared gains on an unexpectedly large build in US crude stockpiles. Crude inventories rose by 7.5m barrels last week, according to the American Petroleum Institute. The Energy Information Administration is forecast to report a draw of 2.1m barrels when it releases its weekly report later today. If the EIA confirms the API numbers it would be the biggest build in inventories since late May. There is a risk that there is a greater and faster build-up in inventories as states have rolled back some lockdown restrictions and demand may not have picked up as quickly as anticipated. Jobless claims figures indicate far fewer trips made for work.

US stocks finished up on Tuesday but only just and closed near the lows of the day. The Nasdaq fell 0.8% but the S&P 500 rose 0.17% and remains up for 2020. European stocks were a tad weaker this morning, but the DAX has cleared its Jun range. The FTSE 100 continues to chop around the middle of its range and may face some pressure from a strengthening pound.

Whilst the EU has worked out its stimulus, the US is trying to fashion its latest package. Senate Republican leader Mitch McConnell said he expects another round of direct payments to feature in the next package, with the $600 weekly top-up cheques coming to an end this month, an abrupt drop in earnings for many households.

Tesla shares fell over 4% yesterday as the stock continues its wild ride that has seen it rally over 270% this year. The company is likely to report a fourth straight quarterly profit later today after the closing bell on Wall Street, which would clear the way for it to enter the S&P 500 and may explain the recent rally as funds have decided they will need to own some of it. Estimates range from an earnings per share (EPS) loss of $2.50 on revenues of $2.77bn to a $1.5 profit on $6.2bn in sales.

The stock pushed to all-time highs close to $1,800 after the company said it delivered 90,650 vehicles in the second quarter, well ahead of both what the company had guided and the Street expectation for 83,000 vehicles. The company has successfully ramped production at its Fremont site and the Shanghai plant also came back online after being forced to shutter in the first quarter due to Covid. China sales are picking up with Tesla selling almost 12,000 Model 3s in May. JMP Securities analyst Joseph Osha, one of the stock’s biggest bulls, downgraded this week to market perform from outperform.