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Dollar Edges Higher Supported by the Stronger Inflation Outlook

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Equities

Major U.S. indices covered the losses incurred after the United States threatened with new tariffs on $200 billion of Chinese imports on Wednesday, and closed solidly higher. Some White House officials announced yesterday that the US and China are holding high-level discussions to avoid a trade war. The Dow Jones gained 0.9% yesterday, and the strong performance continued during the Asian session where the index reached a high of 24997. The SPX500 traded at a five-month high of 2804. The top performer was the tech-heavy Nasdaq Composite which closed at a record high of 7823. However, U.S. stocks could come under pressure as China reported its highest one-month trade surplus with the US. President Trump is widely expected to comment on the trade surplus and threaten China with new tariffs.

USD

The dollar index which measures the greenback against a basket of major currencies rose for the fourth consecutive day to reach a ten-day high of 94.94. The dollar is gaining strength from the bullish economic outlook of the United States which is supporting higher US Treasury yields. The US economy possible grew by four percent in the second quarter which shows a huge growth differential between the United States and major economies. Moreover, the inflation figures hint that the Federal Reserve can continue further raising the interest rates towards neutral level. However, the US economy could face challenges from the consequences of a trade war between the US and its rivals. Next week, Fed’s Chairman Jerome Powell will deliver the semi-annual monetary policy report to the Senate Banking Committee which is a key event for the dollar. USDJPY is close to post its biggest weekly gain since September, the pair gained almost two percent this week and rose from 110.41 to a high of 112.77.

Metals

Gold prices rebounded slightly off a ten-day low to settle at $  1246 per ounce. If gold ends the week below $1248, it will be the lowest weekly close in a year. The precious metal remains under pressure as investors favor the US treasury to the non-yielding bullion to offset market risks. From a technical analysis perspective, gold is trading near a three-year upward trend-line, formed by combining the lows of 2015, 2016, and latest 2018 low. On the other hand, the silver ounce rebounded-off a seven-month low to settle higher at $15.92.

Oil

Oil prices ended mixed yesterday as the Brent oil attracted some buyers after the heavy sell-off that occurred on Wednesday whereas the West Texas intermediate continued lower. Brent Oil bounced-off a one month low and settled higher at $74.45 whereas the West Texas Intermediate posted its lowest daily close in three-weeks at $70.32. Oil prices are about to post their biggest one-week decline in two months as investors focused on the return of Libyan oil to the market and global growth concerns. The U.S. energy services firm, Baker Hughes, will report the weekly U.S. oil rig count today.

Major Economic Events

GMT Country Event Expectation Previous
14:00 US Michigan Consumer Expectations (Jul)  89.7  89.1
14:00 US Michigan Consumer Sentiment (Jul) 98.1 98.2
17:00 US U.S. Baker Hughes Oil Rig Count   858


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