03-Feb-2021

1) RBA’s Dovish Outlook Forces AUD/USD To Reverse Recent Uptrend
2) GBP/USD: Confined In A Two-Week-Old Trading Range, Awaits BoE On Thursday
3) EUR/USD: Next Relevant Target for Bears Is Pegged Near 1.1930 Area
4) XAU/USD: Gold Rebounds On US Stimulus Progress But Not Out Of The Woods Yet

1) RBA’s Dovish Outlook Forces AUD/USD To Reverse Recent Uptrend

The Australian dollar tested fresh year to date lows overnight, drifting below 0.76 US cents, moving against broader market sentiment following dovish commentary from the RBA. Having touched intraday highs at 0.7660 in the lead up to the RBA policy announcement the AUD fell steadily through the afternoon, extending losses into offshore trademarking new lows at 0.7566. Policymakers surprised markets choosing to extend their QE program and raise the bar for any future interest rate adjustment. While the RBA did upgrade its economic outlook, it suggested a return to labor market conditions that would support a rate hike were unlikely to be met until 2024. Such a pessimistic and long-dated forecast suggests record low-interest rates will remain unchanged for much longer than first anticipated. Australia exemplary control of COVID-19 and quicker than expected recovery in domestic economic activity had some analysts pricing in RBA policy tightening ahead of other major central banks. Today’s commentary suggests the RBA is in no rush to outpace its counterparts weighing on AUD upside through the short and medium-term as the expected yield advantage evaporates. With risk demand still intact we expect the AUD will find support on moves approaching 0.7570 and 0.75 with resistance forming on breaks toward 0.7660/0.7680.

The USD found sustained support through trade on Tuesday, buoyed by extension in euro downside and divergence in currency market movements and equity performance. The dollar index edged upward as the euro approached supports at 1.20 despite stronger than anticipated GDP data sets. Eurozone GDP contracted just 0.7% through Q4, well ahead of estimates suggesting a 2% decline. The positive print provides some hope the common market can rebound strongly, however with national lockdown still in place across many countries and the vaccine rolls out slow, an H1 recovery is unlikely with growth suppressed through Q1 and Q2.

Our attentions turn now to the Bank of England policy meeting and monetary policy statement tomorrow. With the UK firmly entwined in the throes of the Pandemic and early Brexit adjustments weighing on the growth outlook, we expect the BoE will maintain its accommodative policy platform. With expectations for a shift to negative rate moderating over recent weeks, any signal policymakers are considering further interest rate adjustments will weigh on the GBP. For now, optimism and a rapid vaccine rollout continue to prop up sterling, and we expect the currency will hold onto gains above 1.35 with resistance on moves approaching 1.40.

2) GBP/USD: Confined In A Two-Week-Old Trading Range, Awaits BoE On Thursday

The GBP/USD pair had some good two-way price moves on Tuesday and was influenced by a combination of diverging forces. The pair gained some positive traction through the European trading session and climbed back above the 1.3700 mark, albeit struggled to capitalize on the move. A strong pickup in the US Treasury bond yields – amid signs of progress towards additional US fiscal stimulus measures – underpinned the US dollar. This, in turn, was seen as one of the key factors that capped gains for the major, rather than prompted some selling at higher levels.

In the latest development, Democrats in the US Congress took the first steps toward advancing President Joe Biden’s proposed $1.9 trillion COVID-19 relief package without Republican support. Democrats opened debate on a fiscal 2021 budget resolution with coronavirus aid spending instructions, unlocking a legislative tool to pass stimulus spending amid Republican opposition. Expectations of a larger government borrowing pushed the US bond yields higher across the board.

Meanwhile, renewed optimism over a massive US economic stimulus lifted hopes for a strong global economic recovery. This, along with positive news related to the development of another COVID-19 vaccine, boosted investors’ appetite for riskier assets. Reuters reported on Tuesday – citing the peer-reviewed trial data – that the Sputnik V coronavirus vaccine developed in Russia showed an effectiveness rate of 91.6% in the phase-3 trial. The risk-on flow capped gains for the safe-haven USD and helped limit any deeper losses for the major.

The British pound was further supported by diminishing odds for any BoE rate cut in 2021. In fact, UK money markets indicated that investors have pushed back bets for a 10bps interest rate cut by the BoE to 2022 vs the previous expectations for such a move in December. The pair finally settled around 55-60 pips off daily lows, though lacked any follow-through and edged lower during the Asian session on Wednesday. That said, the downside is likely to remain cushioned as investors might refrain from placing aggressive bets ahead of the BoE meeting on Thursday.

In the meantime, the release of the final UK Services PMI will be looked upon for some impetus. Later during the early North American session, the release of the US ISM Services PMI will influence the USD price dynamics. Apart from this, the broader market risk sentiment will also be looked upon for some meaningful trading opportunities.

From a technical perspective, the pair has been oscillating in a range over the past two weeks or so. The range-bound price action constitutes the formation of a rectangle, indicating a brief pause before the next leg of a directional move. Given the recent strong move up, the rectangle might still be categorized as a bullish continuation pattern. However, repeated failures near the 1.3755-60 congestion zone warrant some caution. This makes it prudent to wait for a sustained breakout from the mentioned trading range before placing any directional bets.

The lower boundary of the trading range is pegged near the 1.3610-1.3600 region, which if broken decisively will negate the near-term positive bias. The pair might then accelerate the corrective slide and drop to challenge the key 1.3500 psychological mark with some intermediate support near the 1.3540 horizontal zone.

On the flip side, the 1.3700-1.3710 region now seems to have emerged as immediate resistance and is followed by the 1.3755-60 congestion zone. A sustained strength beyond will be seen as a fresh trigger for bullish traders and pave the way for a further near-term appreciating move. The pair might then surpass the 1.3800 mark and aim to test the next relevant resistance near the 1.3840 region. Some follow-through buying has the potential to push the pair further towards the 1.3900 round-figure mark.

3) EUR/USD: Next Relevant Target for Bears Is Pegged Near 1.1930 Area

The EUR/USD pair struggled to capitalize on its early uptick to the 1.2100 neighborhood, instead met with some fresh supply and dropped to two-month lows on Tuesday. The shared currency was weighed down by concerns that the slow rollout of COVID-19 vaccines in Europe could hamper the economic recovery. On the economic data front, the prelim Eurozone GDP report showed that the economy contracted by 0.7% during the October-December period. The reading was less bad than the 0.9% drop anticipated but marked a sharp slowdown from the downwardly revised 12.5% growth recorded in the previous quarter and did little to impress bulls.

On the other hand, signs of progress towards additional US stimulus measures triggered a fresh leg up in the US Treasury bond yields and helped revive the US dollar demand. This, in turn, was seen as another factor that exerted some additional downward pressure on the major. Democrats in the US Congress took the first steps toward advancing President Joe Biden’s proposed $1.9 trillion COVID-19 relief package without Republican support. Democrats opened debate on a fiscal 2021 budget resolution with coronavirus aid spending instructions, unlocking a legislative tool to pass stimulus spending amid Republican opposition.

Meanwhile, renewed optimism over a massive US economic stimulus lifted hopes for a strong global economic recovery. This, along with positive news related to the development of another COVID-19 vaccine, boosted investors’ appetite for riskier assets. Reuters reported on Tuesday – citing the peer-reviewed trial data – that the Sputnik V coronavirus vaccine developed in Russia showed an effectiveness rate of 91.6% in the phase-3 trial. The risk-on flow was seen as the only factor that kept a lid on any further gains for the greenback and assisted the pair to find some support ahead of the key 1.2000 psychological mark.

The pair finally settled around 30 pips off daily lows, albeit lacked any follow-through buying, and remained confined in a range through the Asian session on Wednesday. Market participants now look forward to the release of the final Eurozone Services PMI prints for a fresh impetus. Later during the early North American session, the release of the US ISM Services PMI will influence the USD price dynamics and further produce some trading opportunities. Apart from this, traders will also take cues from developments surrounding the coronavirus saga, US stimulus headlines, and the broader market risk sentiment.

From a technical perspective, the overnight break through the 1.2060-55 strong horizontal support might have already set the stage for a further near-term depreciating move. Subsequent weakness below the 1.2000 mark will add credence to the negative outlook and turn the pair vulnerable to accelerate the slide towards the 1.1930 resistance-turned-support zone.

On the flip side, an attempted recovery move might now confront stiff resistance near the overnight swing highs, around the 1.2085-90 region. Any further positive move beyond the 1.2100 mark is more likely to be seen as a selling opportunity and runs the risk of fizzling out rather quickly near the 1.2140-50 supply zone. Only a sustained breakthrough of the mentioned resistance levels will negate the bearish bias and allow the pair to resume its prior/well-established near-term uptrend.

4) XAU/USD: Gold Rebounds On US Stimulus Progress But Not Out Of The Woods Yet

Gold (XAU/USD) is attempting a minor bounce after falling over 1% to eleven-day lows at $1830 on Tuesday. The yellow metal slumped as the US dollar rallied hard on the macroeconomic divergence between the US and Euro area economies. The relative strength of the US economic recovery amid the coronavirus crisis drove the greenback broadly. The social media-driven retail-trade frenzy fizzled and weighed heavily on silver prices alongside gold. Markets also favored the US currency amid ongoing talks on fiscal stimulus.

Wednesday’s pullback in gold can be mainly attributed to the progress on a likely US fiscal stimulus deal. The Senate voted 50 to 49 in a straight party-line decision in order to push through a $1.9 trillion aid package proposed by President Joe Biden. However, the covid vaccine-driven optimism could cap the recovery attempts in gold. Also, if the US dollar resumes the recent advance, gold could once again feel the pull of gravity, as the technical picture also suggests limited upside.

The daily chart shows that a bear cross is in the making for gold, suggesting that the sellers could remain hopeful despite the latest bounce.

The bearish crossover will get confirmed once the 21-daily moving average (DMA) pierces the 200-DMA from above. Also, adding credence to the downside bias, the Relative Strength Index (RSI) continues to hold below the midline.

Therefore, a retest of Tuesday’s low at $1830 cannot be ruled, below which the January 13 low of $1803 would come into play. Further south, the November 30 high at $1790 could offer some support to the XAU bulls.

Wednesday’s fall prompted gold to breach the critical 200-daily moving average (DMA) at $1850, with the path of least resistance seemingly downside after closing the day below the 200-DMA support.

On the flip side, the buyers need to find acceptance above the critical $1854, where the 21 and 200-DMA look to coincide. The next upside target awaits at the 50-DMA of $1858. The path of least resistance, therefore, appears to the downside.