While Iran Threat Keeps Oil Elevated, U.S. Stocks and Dollar Slip

by: Grace Cheng

Oil continues to trade near elevated levels (above $143 as at the time of writing) on Iranian verbal threats, and the Dow Jones Industrial Average is down more than 130 points. Iranian Deputy Oil Minister was reported as saying Iran is ready to repel any attack, and said that an attack would disrupt oil exports and disrupt the entire oil industry in the Middle East. Middle East tensions are at the forefront again. Meanwhile, OPEC president said that oil prices reflect war risk, and to keep oil prices down, the US needs to stabilise the US dollar.

For the dollar to be stabilized, that’s not an impossible task. Further dollar decline could be prevented if traders can see a commitment by the Fed to fight rising inflation, but alas, the Fed thinks that inflation is likely to moderate later this year.

US Manufacturing Improves

What a surprise to see a totally unexpected expansion in US manufacturing activity, that is according to the ISM report released Tuesday. The headline purchasing managers index went up to 50.2 in June (48.6 expected) from 49.6 in May, and since it is above the 50 mark, it indicates growth, not contraction, in the important manufacturing sector. Although this is the first growth in four months, it may not be a harbinger of more growth ahead.

Forex Trading

In the currency markets, major currencies have been trading sideways, without any strong push to break out of the recent trading range. The US dollar is slightly weaker against the Euro, Swiss franc, British pound and the Japanese yen; after all, there’s no incentive for dollar bulls to jump into the market before the Great Lottery of the Month (that is, the US NFP) is unleashed on Thursday. EUR/USD oscillates between 1.5720 and 1.5820. USD/CHF’s nearest support is around 1.0100-20, then 1.0080.

GBP/USD Hits 2.0000

The British pound rose to the highest level against the dollar in more than 2 months, reaching an intraday high around 2.0005, but is now trading below 1.9950. Any reasons for Sterling strength today? None actually, in fact, UK data released today was quite a turn-off, so traders could be having a more depressed view of the US dollar when it comes to Cable trading.

UK PMI manufacturing for June printed a low reading of 45.8, much worse than the 49.8 expected, and that was the lowest since 2001. As for the UK housing market, Nationwide reported today that UK house prices fell 0.9% month-on-month in June, slightly better than the 1% fall expected, and a slower pace of decline from May’s 2.5% decline.

Economic Calendar for Wednesday:

Australia retail sales 0130 GMT

Eurozone PPI 0900 GMT

US ADP employment change 1215 GMT

US factory orders 1400 GMT

Paulson speaks about capital markets, global economy 1500 GMT