A strong dollar will dominate currency markets as equities continue their volatile ride

The US Dollar Index has appreciated by 2% since its June 10 lows

Recovering commodity prices also weigh on the greenback as the correlation between the two moved to the most negative in over two years. Getty Images

Markets remain highly sensitive and continue to trade in a choppy manner. Over the past two weeks, we have seen the dollar strengthen with the US Dollar Index moving above 97.71 levels – that’s a more than 2 per cent appreciation from those June 10 lows.

This dollar strength has capped any gains in EUR/USD and GBP/USD pairings. The euro has continuously run out of steam at $1.1350 levels against the greenback, which suggests an upward ceiling for the pair.

Looking ahead, I expect my long-standing view of weaker currencies in favour of a stronger dollar will continue as volatility continues for equities with a slight bearish bias

However, the weakness in the GBP/USD pairing has been more pronounced, with the cross trading below $1.23 levels after peaking at $1.2780 levels in early June. The stronger greenback has seen gold stall at $1,770 levels following a rather impressive rally in the second quarter of 2020. Since April 1, gold has rallied from $1,577, a gain of $200 per ounce or 13 per cent.

Meanwhile, equity markets remain range-bound with the Dow Jones Index continuing to find support at 25,000 and any upsides capped at 27,500.

Looking ahead, I expect my long-held view of weaker currencies in favour of a stronger dollar will continue as volatility continues for equities with a slight bearish bias. Gold, on the other hand, remains a strong candidate for further upsides in the next few weeks. However, with the precious metal trading at the top end of the channel and the current inactivity at $1,770, waiting for a sell-off towards $1,750 and lower would be wise before building long positions.

The balance of US equity markets will continue to be a tug of war between deteriorating sentiment from emerging coronavirus cases and improving sentiment from more central bank action. At the weekend, we saw global cases hit the 10 million mark with the death toll from the virus crossing 500,000. We have seen pockets in the US report a surge in coronavirus cases and this will keep any gains in the equity segment in check – a trend set to continue. This market sensitivity underlies my confidence in strength of the dollar in the near term.

Economic data points to consider include China manufacturing data continuing to build on its positive trend since the lockdown lifted back in March. This pattern should reflect across European and American data releases and we will continue to focus on the US jobs situation.

All eyes will be on June’s US Nonfarm payrolls report due out this week. Due to the US Independence Day celebrations on Friday, the payrolls report will release on Thursday. May’s payrolls famously surprised markets and posted a positive tally of 2.5 million additional roles.

This month’s reading will confirm whether May’s figure was a fluke. There are estimates that 3 million new jobs were added in June, however, approach these figures with caution. The reporting of this number and how someone is actually classified as unemployed has raised doubts and as a result the positive print could be misleading.

If we do see a positive reading on the jobs report, expect risk appetite to rise, which would ultimately give a nice boost to US equity markets and build on the momentum through the first half of July.

Gaurav Kashyap is a market strategist at Equiti Global Markets. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti