European futures are trading higher as traders react to a number of positive news stories that give them a fresh breath. The fact that the ECB’s commentary wasn’t too far from its dovish action has made traders optimistic that there would be at least two more rate cuts in the pipeline for this year. It is true that the EUR/USD actually moved higher on the back of the dovish actions of the European Central Bank, but the reason for it moving higher is mainly because the currency has become desirable as the fundamentals are strong for the Eurozone and investors have more confidence in the bank’s strategy, which has been able to tame inflation like no other central bank—especially when you look at the ECB’s desired target level and the actual inflation reading.
Chinese Export Number
Further upward momentum in the market is due to traders liking the data from China. There used to be a time when data out of China was mostly good; however, since COVID, the economic numbers have been less satisfying for many investors and traders. The fact that China is the second-biggest economy in the world, coupled with today's data indicating faster-than-expected growth, is a significant development for market players. In US dollar terms, the actual export number rose by 7.6% in May from a year ago, and it was also well ahead of the forecast print of 6%. However, there was some weakness in the import numbers, which didn’t show that much improvement; the actual number grew by 1.8%, missing the forecast of 4.2%. However, in China, investors primarily concentrate on the export figures. If these figures are satisfactory, there is a sense of celebration in the streets, which explains the green hues observed in Asian markets.
US NFP Data
In the US, traders and investors primarily concentrate on the most influential economic data, the US NFP data. The Fed and market players greatly value this data. This economic data point is very likely to influence the Fed's monetary policy, as the labor market is an important part of the Fed's mandate. The forecast for today’s number is 182K, while the previous number came in at 175K. In many aspects, we have already established a low threshold, and the ADP data this week indicates a greater likelihood of disappointment in the number, a factor that has already influenced the market's expectations. The market's expectations do not factor in the possibility of a significantly lower number than the current expectation, which could lead to market fluctuations.
If the number misses the forecast by a mile, we could be looking at two possible scenarios. Firstly, market players may speculate that a negative data print could prompt the Fed to lower interest rates, leading to a surge in the US stock indices following the initial emotional reaction.
In the other scenario, traders and investors may lose confidence in the Fed's ability to handle the situation, leading to further damage to the Fed's reputation. Under that scenario, we could see the US stock indices tanking in a serious way, and we could potentially see a worse one-day loss in a long time for the US stock market.
Gold and Bitcoin
Gold and Bitcoin prices are also likely to remain highly sensitive today, thanks to the US NFP. Any weakness in the dollar index, which may happen on the back of speculation that the Fed will cut interest rates lower sooner than earlier, may push the prices of both asset classes sharply higher.
Another scenario that could occur today is if the market collapses due to negative data points, prompting investors to seek out safe haven assets. Gold is undoubtedly the most popular option, which could lead to a surge in its prices. Meanwhile, Bitcoin remains challenging due to its reputation as a risky asset. Typically, during a market sell-off or a reduction in risk appetite, it tends to decline in value.
Finally, if the US NFP data is strong, we could expect the dollar index to rise as market players anticipate the Fed to maintain higher rates for a longer period. However, this scenario may not be optimal for gold prices, as a strength in the dollar index often leads to a decline in both gold and bitcoin prices. However, bitcoin has a strong correlation with riskier assets, so it can actually move higher as well, depending on what the market players take away from the US NFP data. Below chart for Bitcoin shows important price levels to keep an eye on today.
On the date of publication, Naeem Aslam did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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