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A hit from an unexpected direction

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The attack on Saudi Arabia has raised the geopolitical risk to its zenith and focuses on investors attention at the beginning of the week. At the beginning of the trade, Brent crude marked the biggest jump in history and in the morning the price is still around 10% higher. Other markets are also affected by these events. The gold, yen, and oil become more expensive and therefore the currencies based on these instruments. The prices of stock indices are lower. At the moment, two questions are crucial: how quickly will it be possible to restore production and whether the tension between Iran and the United States will be discharged. The market has recently forgotten about geopolitical risk in the Middle East, Monday morning shows that it is wrong.

Throughout the week, the market awaits Wednesdays Fed meeting. At the same time, markets constantly and vigilantly analyze all information about trade wars. This problem is a bit like a wreath: a stand-up. Since the last ten days in the market have been optimistic that the agreement is not only possible but also very close, is it time to ignite the dispute? We recommend a skeptical judgment regarding trade wars and Brexit. This translates into a cautious approach to the possibility of continuous strengthening by the pound, as well as a direct negative attitude towards the antipode currencies.

Returning to the key event of the week: in our opinion, the Fed will cut interest rates by 25 bp, to the range of 1.75-2.00%. The communication of the monetary authorities will be very gentle, why? First of all: the main economic barometers have declined since the July meeting. Secondly, trade wars have swollen and we have seen an episode of greater volatility in financial markets. Third, some decision-makers are concerned about the reversal of the performance curve. This process has only deepened in recent weeks. Therefore, the question can be asked: why not a 50 bp reduction? Trump would certainly be happy ... The answer is simple: such movements are reserved for crises and, of course, this cannot be now.

In addition to the Feds decision (Wednesday), we will also learn a number of other interesting facts, which of course will remain in the background. Today Monday we get the reading of the NY Empire State, that is, the first regional economic indicator of the climate in the market. On Tuesday it will bring data from the US industry, which will be analyzed in terms of whether they confirm the weakness suggested by the polls and soft indicators. On Wednesday and Thursday, along with weekly readings of changes in oil stocks and the number of newly registered unemployed, a package of real estate market readings will also see the light of day. His condition in silence and deep down has deteriorated in recent months. We remain negative about the dollar due to monetary policy prospects. We see value in the euro, Scandinavian currencies and also in Canadian dollars. For the last of these currencies, Wednesdays inflation reading and Fridays retail sales data will be key.

In the euro area, the most important events accumulate for Tuesday. These will be the ZEW index and the speech by ECB chief economist Lane and Coeure scheduled for 5:30 p.m. (Spanish peninsular time). It may shed some more light on the recent loosening of the policy by the ECB. The pound market is still dominated by the issue of Brexit. However, it is worth knowing the opinion of the Bank of England on this subject. An opportunity for this will be Thursdays meeting, in which, of course, the policy parameters will not change. Previously, because on Tuesday we will know the dynamics of inflation. This week, decisions on interest rates will also be taken by Norges Bank, which will raise rates.

Japans data will not attract attention and Fridays data on inflation should be taken into account, but great volatility is not expected with them. On Thursday, the Bank of Japan will confirm that its policy remains at the current rate. In this situation, the strength of the yen will continue to be shaped by the global sentiment and performance level of US Treasuries. This week is the worst for the yen this year and our underlying scenario is corrective strengthening. The preferred vehicle is the AUD/JPY pair.

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Source: TMS Brokers
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