Global risk sentiment revived by stimulus hopes…but for how long?

By Lukman Otunuga, Senior Research Analyst, FXTM

A sense of positivity is sweeping across financial markets on Tuesday amid signs of progress in trade negotiations and hopes of stimulus in major economies.

Asian markets were mixed during early trading after China’s central bank announced a key interest rate reform over the weekend – a move seen supporting economic growth. The mood across European markets is set to improve further on rising optimism about stimulus measures in Germany after Finance Minister Olaf Scholz suggested that Berlin could spend up to €50 billion in an economic crisis.

While stimulus hopes and renewed trade optimism are clearly fuelling global equity bulls, the question is for how long?

The explosive movements witnessed across financial markets last week highlight how global sentiment remains fragile and highly sensitive to geopolitical risk factors. Equity bears have enough ammunition to make an unwelcome return should renewed trade tensions and global recession fears rekindle risk aversion.

King Dollar comfortably sits on its throne

The mighty Dollar continues to tighten its grip across currency markets as the Dollar Index (DXY) hit a fresh three-week high at 98.40 on Tuesday.

Stimulus hopes are sending investors away from safe haven assets, which is lifting US government bond yields – consequently supporting king Dollar.

Where the Dollar concludes this week will be heavily influenced by the FOMC minutes and Chair Jerome Powell’s speech in Jackson Hole on Friday. Should the minutes and Powell’s speech confirm expectations of a US interest rate cut in September, the Dollar has the potential to weaken.

In regards to the technical picture, the DXY remains bullish on the daily charts. An intraday breakout above 98.50 should inspire a move higher towards 99.00.

Commodity spotlight – Gold

Gold bulls are engaged in a fierce battle to defend the $1500 psychological level as investors seek riskier assets.

While the improving market mood has the potential to send the precious metal lower in the near term, the medium to longer term outlook remains bullish. Gold is seen finding ample support from a dovish set of Fed minutes and if Powell signals a September interest rate cut during his speech at Jackson Hole.

In regards to the technical picture, Gold is bullish on the daily charts. Should $1500 prove to be a reliable support, prices are seen rebounding towards $1525 and $1550. A breakdown below $1500 opens the doors towards $1485.