Asian currencies began the new week on a mixed note against the US Dollar index, with the DXY holding on to gains around the 97.5 mark following better-than-expected US retail sales and manufacturing output data. The mixed economic indicators out of the world’s largest economy is threatening to erode the case for a Fed rate cut, even as markets cling on to expectations for some measure of US monetary policy easing over the coming months.

All eyes will be on the Federal Reserve’s policy announcement on Wednesday, where any hint of waning patience from policymakers could undermine the Greenback’s recent gains. It remains to be seen which part of the economic equation will hold most of the Fed’s attention – confidence that the US economy’s record-breaking expansion has more room to run, or the growing downside risks stemming from President Donald Trump’s trade conflicts with global economies. Should markets detect the Fed’s bias towards an “insurance” rate cut, the Dollar index could retrace towards its 100-day moving average of 97.0, with stronger support potentially coming at its 200-day moving average of 96.59.

Is market pessimism overdone?

As strong headwinds continue to swirl around the global economic outlook, coupled with geopolitical risks that are keeping investors on edge, safe havens appear cocooned in a supportive environment. So far this month, the Japanese Yen has mostly traded around the 108 handle against the US Dollar, Gold has remain supported above the $1,320 level, while 10-year Treasury yields have stayed mostly below 2.15 percent, around its lowest levels since 2017.

Amid the thick cloud of risk aversion evident in the markets, investors may be underpricing the likelihood of a positive surprise out of the G20 summit later this month. A Trump-Xi meeting that marks a resumption of US-China trade talks isn’t the base case for many investors at this point in time. However, a positive surprise on this front could significantly alleviate risk sentiment and move USDJPY back towards the 110 handle while Gold could trade back below the psychological $1,300 mark.

Oil traders reminded of fragile demand outlook amid supply-side risks

Brent crude is holding above the $62/bbl at the time of writing, as OPEC continues to stoke market confidence that the ongoing supply cuts will be extended through 2019; with the decision potentially made in early July. OPEC+ producers’ attempts to rebalance the markets could also get a boost by the seasonal pickup in demand in the second half of the year.

Oil bulls may also point to geopolitical tensions in the Middle East as further justification to reclaim gains, as supply risks make a return to investors’ radars. However, markets have been reminded of the fragility of the demand outlook, following the International Energy Agency’s forecasts that supply will outgrow demand in 2020. This could quickly tip markets into oversupplied conditions and limit gains for Oil prices over the course of this year.

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