03-Sep-2020

1) Crude Oil Is Testing Major Support After Worries Of Weak Demand
2) Gold: Sell The XAU/USD Bounce Ahead Of ISM Services PMI?
3) EUR/USD: ECB Sends Euro To Critical Support, Break Or Bounce?
4) GBP/USD: 1.3265-60 Resistance Breakpoint Holds The Key, UK/US Pmis Eyed

1) Crude Oil Is Testing Major Support After Worries Of Weak Demand

There was no shortage of strong movements in the markets on Wednesday. However, a short-lived dip on the stock market was quickly bought back. In contrast, moves on the currency and commodities markets were one-sided.

Brent and WTI prices lost over 3% on Wednesday. The decline in Oil coincided with the release of weak US labour market data from ADP, which showed an increase of 438,000 jobs in contrast to the expected 1.25 million increase.

The Oil pressure increased with the release of weekly assessments of reserves and production in the USA. The failure of production from 10.8 million to 9.7 million barrels per day was due to a hurricane that paralysed output in Texas and the Gulf of Mexico last week. Reserves have declined by 9.3 million, but the decline seems small given the production collapse. Still, it was 17.8% higher than this week one year ago. This has alerted us to a recovery in demand for Oil.

An additional pressure factor in the commodity and currency markets was the strengthening dollar. As there are no risks of an increase in US rates on the horizon, the demand for USD can be explained by a lower risk demand and concerns about weak consumer and business activity.

The Chief Economist of the ECB drew attention to the exchange rate, which central banks and politicians are trying to avoid. The 12% appreciation of the euro against the dollar in the previous four months is a threat to Europe’s recovery, where many economies have lost more than the US in Q2 but struggled to recover as euro growth promises to suppress exports.

The ECB’s attention to the euro a week before the monetary policy decision should be seen as a signal of a softening tone or new easing, which is good for stock markets and negative for the single currency.

Presumably because of this, stock purchases have remained strong, which indicates investor optimism. This optimism may also return to previous trends in the form of a weakening dollar and a recovery in oil prices.

On the technical side, Brent is now testing a 50-day average from top to bottom and has not managed to exceed 200 days. The bear attack from an important technical level indicates medium-term pessimistic expectations.

Brent planting below $44 could be a signal of a deeper and longer-term correction with potential targets at $36. The baseline scenario is still more optimistic with support close to current levels and a reversal to growth with targets around $50 by the end of the year.

2) Gold: Sell The XAU/USD Bounce Ahead Of ISM Services PMI?

Gold (XAU/USD) sold-off aggressively amid the ongoing broad-based US dollar comeback on Wednesday and finished the day at $1942, having booked a 1.5% loss. The US dollar extended its profit-taking rally after upbeat US Factory Orders bolstered the optimism over the improved economic recovery, triggered by stronger US ISM Manufacturing PMI. Further, the sell-off in the euro on the European Central Bank’s (ECB) jawboning the exchange rate value also aided the recovery in the dollar from two-year troughs. Additionally, Wall Street’s record-breaking rally on US fiscal stimulus hopes and economic optimism also weighed on the safe-haven gold.

So far this Thursday’s trading, gold attempted a pullback from three-day lows but the bounce appeared shallow, as the dollar held onto the overnight gains. All eyes now remain on the US Jobless Claims and ISM Services PMI data for a fresh direction in the yellow metal. In the meantime, ‘sell the bounce’ trading could remain in play, as the technical outlook appears bearish in the near-term.

On the hourly chart, gold is on the verge of a bear flag breakdown, as it is testing the rising trendline support at $1944.

An hourly closing below the latter will confirm the bearish breakdown, opening floors for a test of last week’s of $1903. The bulls, however, could be offered some temporary respite near Wednesday’s low of $1932.72. The next relevant cushion comes in around the $1925 region, last Friday’s low.

Should the price manage to resist above the latter, a bounce-back towards the robust support now resistance at $1944 will be on the cards. The buyers will then aim for the key $1950 barrier, the convergence of the horizontal 200-hourly Simple Moving Average (HMA) and bearish 21-HMA. The hourly Relative Strength Index (RSI) points south while below the midline, suggesting more scope to the downside.

3) EUR/USD: ECB Sends Euro To Critical Support, Break Or Bounce?

The recent rise in the euro is “always worrisome when you have weak demand” – the words of unnamed officials at the European Central Bank quoted in the Financial Times are weighing on the common currency. The market-moving story on the pink sheets of the FT joins comments by Philip Lane, the ECB’s Chief Economist, who said the institution is “following” the exchange rate.

EUR/USD has dipped below 1.18, completing a fall of over 200 pips from the 2020 peak of 1.2010. The common currency’s climb was fueled by the Federal Reserve’s dovish policy shift – striving for full employment at the expense of potentially overheating inflation.

Will the ECB follow with its own “paradigm shift”? Christine Lagarde, President of the European Central Bank, announced a policy review when she assumed office in 2019. However, the Frankfurt-based institution has been busy with the coronavirus crisis and seemed to put that exercise on cold ice.

Tension is mounting around the upcoming meeting of the bank next week, where Lagarde will likely be asked about the value of the euro and any policy measures to address its strength.

While EUR/USD’s slide early in the week can be partially attributed to a data-based dollar, recovery, the most recent prominent American indicator fell short of estimates. ADP’s private-sector jobs report pointed to an increase of only 428,000 positions, far short of around one million expected. The data was somewhat dismissed by investors, as the firm has been off the mark in recent months.

Thursday’s figures are already of higher interest. Weekly initial jobless claims for the week ending August 24 are set to drop below one million once again, pointed to gradual improvement. More importantly, the ISM Services Purchasing Managers’ Index is the last clue ahead of Friday’s Non-Farm Payrolls report.

Economists expect a drop in the headline Services PMI and also a collapse in the employment component. Projections may be too downbeat, lowering the bar for an upside surprise.

Stock markets have been extending their uptrend, partially powered by hopes for a COVID-19 vaccine to come as early as next month in some US states. The urge to distribute the treatment raises concerns of political interfering ahead of the elections. Nevertheless, any positive development could boost equities and weigh on the safe-haven dollar.

On the other hand, Washington announced movement limitations on Chinese diplomats, retaliating for a similar move by Beijing. Worsening relations between the world’s largest economies could boost the greenback.

Overall, the euro has reacted to the ECB’s concerns, and that move may have reached its limits. US data is next to determine EUR/USD’s direction.

4) GBP/USD: 1.3265-60 Resistance Breakpoint Holds The Key, UK/US Pmis Eyed

The GBP/USD pair witnessed some selling on Wednesday and extended the previous day’s retracement slide from the vicinity of the key 1.3500 psychological mark, or YTD tops. The US dollar built on its corrective bounce from two-year lows and was seen as one of the key factors that prompted some profit-taking. Traders largely ignored Wednesday’s weaker than expected ADP report, which showed that the US private-sector employers added only 428K jobs in August as compared to the 950K expected.

The pair lost some additional ground after the Bank of Governor Andrew Bailey said that the downside risk to forecasts from the coronavirus outbreak is much bigger than for Brexit. This comes on the back of Bailey’s remarks last week that the UK central bank has plenty of room to add monetary stimulus, including negative interest rates, and increase prospects for more easing. This, in turn, contributed to the pair’s intraday downfall. The pair, however, managed to rebound around 70 pips from daily lows and finally settled with only modest losses, around mid-1.3300s.

The attempted bounce lacked any strong follow-through, rather met with some fresh supply during the Asian session on Thursday. The pair was last seen hovering near weekly lows, around the 1.3285 region as market participants now look forward to the final version of the UK services PMI for some impetus. Later during the early North American session, the US ISM Non-Manufacturing PMI will influence the USD price dynamics and further contribute to produce some meaningful trading opportunities. Meanwhile, the key focus will remain on Friday’s release of the US monthly jobs report.

From a technical perspective, a subsequent below the previous strong resistance breakpoint now turned support around the 1.3265-60 region, will suggest that the recent bullish run might have already run out of the steam. The pair might then accelerate the fall towards the 1.3200 round-figure mark en-route the 1.3140 horizontal support. The corrective slide could further get extended to the 1.3100 mark before the pair eventually drops to the next major support near the 1.3060-50 region.

On the flip side, the 1.3350 area now seems to act as immediate strong resistance and is followed by the 1.3385 horizontal level ahead of the 1.3400 mark. A sustained move beyond should pave the way for additional gains and push the pair back towards the 1.3480 region (weekly tops). Bulls might then aim to reclaim the 1.3500 mark and push the pair towards December 2019 swing highs, around the 1.3515 region.