05-May-2020

1)GBP/USD: Bulls Showed Some Resilience near 1.2400 Pivotal Support
2) FTSE to Post Gains As Oil Recovers For 5th Straight Day
3) EUR/USD Rebound Fizzles

1)GBP/USD: Bulls Showed Some Resilience near 1.2400 Pivotal Support

The GBP/USD pair extended last week’s rejection slide from the very important 200-day SMA and witnessed some follow-through selling for the second straight session on Monday. A US-China spat over the origin of the coronavirus overshadowed the recent optimism about the re-opening of economies in some parts of the world. This, in turn, dented investors’ appetite for perceived riskier assets and boosted the US dollar’s relative safe-haven status, which eventually turned out to be one of the key factors that kept exerting pressure on the major.

Adding to this, increasing prospects for an extended lockdown in the United Kingdom, coupled with the lack of progress in Brexit negotiations further took its toll on the sterling. The pair dropped to three-day lows, albeit once again showed some resilience near the 1.2400 round-figure mark amid a late rebound in the US equity markets. The pair built on the overnight bounce and gained some positive traction during the Asian session on Tuesday amid a turnaround in the global risk sentiment, as depicted by a positive mood around the equity markets.

As governments eased coronavirus-induced lockdowns, investors now seemed to price in the idea that the worst is behind and things are improving. This, in turn, undermined demand for traditional safe-haven currencies and lifted the pair back above mid-1.2400s. Market participants now look forward to the final version of the UK Services PMI for some impetus. Later during the North-American session, the release of the US ISM Non-Manufacturing PMI might influence the USD price dynamics and further contribute towards producing some meaningful trading opportunities.

From a technical perspective, the emergence of buying interest near the 1.2400 pivotal support still favours bullish traders and points to the resumption of the recent bullish trend. Hence, a move back towards reclaiming the key 1.2500 psychological mark, en-route the 1.2520 supply zone, looks a distinct possibility. Some follow-through buying will reinforce the bullish outlook and assist the pair to make a fresh attempt towards reclaiming the 1.2600 round-figure mark. The momentum could further get extended towards challenging 200-day SMA, around the 1.2640-45 region, which if cleared might be seen as a fresh trigger for bullish traders.

2) FTSE to Post Gains As Oil Recovers For 5th Straight Day

The European indices started the week with sharp losses; the DAX (-3.64%) and CAC 40%( -4.24%) were hammered on worries that the renewed tensions between the US and China would prevent the shattered global economy from recovering at a plausible speed.

But the US stocks did better in New York, especially towards the end of Monday’s session. The Dow (+0.11%) and the S&P500 (+0.43%) closed in the positive territory, as Nasdaq was boosted by decent gains in Apple (+1.42%) and Microsoft (+2.45%) shares.

The economic data was not painting a rosy picture, however. The European PMI data confirmed the sharpest contraction in activity on record, as the US factory orders tumbled by more than 10% m-o-m in March, roughly in line with -9.7% expected by analysts.

The US treasury is preparing to boost borrowing by $3 trillion dollars from April to June to finance the exploding government stimulus and there is certainly more to come.

Elsewhere, the Australian construction index and services PMI tanked to record low levels in April as well. The Reserve Bank of Australia (RBA) maintained its interest rates unchanged at today’s monetary policy meeting, as the bank has already done a lot to fight back the coronavirus-led slowdown, especially through massive government bond purchases to inject cash in the economy. The bank widened the range of eligible collateral for repo operations to include a broader range of investment grade AUD-denominated securities issued by non-bank corporations. The AUDUSD rebounded past 64 cents but the Aussie should bump into some resistance into the 64.90 cents, the 100-day moving average, as the uncertain global risk appetite may disservice the beta-currencies amid the rising tensions between the US and China.

The US services PMI and ISM non-manufacturing index should continue painting a gray picture, while the US trade deficit is expected to have risen to $44 billion in March. The US officials are pressuring China to meet its phase-one deal obligations, including massive farm product purchases, but China first needs to heal itself from the coronavirus-crisis. Nevertheless, we believe that China is ready to do its best to avoid spoiling its fragile relationship with the US, despite accusations that they have intentionally created the coronavirus in a Wuhan lab. Both economies need each other to heal fast, which could lead China to swallow its pride to a certain extent.

The Swiss consumer prices have certainly retreated 0.8% y-o-y in April, as a result of a broad shut down in shops and restaurants. The Swiss franc remains strong against the greenback, which shows signs of consolidation amid last week’s sell-off. But the souring market mood gives support to safe-haven currencies, which also benefits to the Japanese yen.

The factory-gate prices in the Eurozone should confirm a 2.6% y-o-y decline in March as a result of subdued activity as countries limited activities to fight the virus. The EURUSD remains bid below the 1.09 mark, hinting that the potential for an attempt to 1.10 is building stronger against the US dollar. Offers should be found near the 100-day moving average (1.0975) and the 200-day moving average (1.1020).

Across the Channel, the pound remains offered below the 1.25 mark against the greenback. The final services PMI data should confirm the most dramatic slump on record and increase the selling pressure on sterling ahead of Thursday’s monetary policy meeting. The Bank of England (BoE) is expected to maintain its interest rates and the asset purchases program unchanged, but investors know that the bank stands ready to do more if needed.

What Sterling investors will be watching is the government’s plans to start reopening businesses later this week. We expect that the lockdown in the UK will likely be extended toward the first week of June and continue taking a toll on the service-heavy British economy for another full month. On the other hand, the clock is ticking louder towards June 2nd when, in the dearth of a progress in the EU trade deal negotiations, Britain will start preparations for a no-deal Brexit. We see little chance of any development on this end, as governments are too busy dealing with the coronavirus crisis.

So, with a historical economic recession underway, topped by an almost certain no-deal Brexit, the medium to long-term outlook for the pound remains negative. Price advances should present interesting selling opportunities. The key resistance lies at the 1.2685/1.2740 range, the 100 and 200-day moving averages, respectively.

Equities were better bid in Sydney (+1.31%) and in Hong Kong (+0.85%), as Japan, China and South Korea remained closed for holidays.

Activity on FTSE futures hint that the British stocks are preparing for a positive start as oil trades higher on a fifth straight session. WTI crude tested the $22 a barrel. Moving forward, the rising tensions between the US and China, added to an already shattered global demand, will certainly limit the upside potential and maintain prices in the negative trend. Offers are eyed at $23/25 area.

3) EUR/USD Rebound Fizzles

After a strong performance last week, EUR/USD yesterday again traded more in line with usual risk-dynamics. European equities had a ‘negative catching up’ to do and this weighed on the euro. Rising US-China political and trade tensions were also euro negative. Uncertainty on a German court ruling on the ECB’s APP maybe caused investor caution toward the single currency too. EUR/USD trended lower in the 1.09 big figure closing at 1.0907. The yen continued recent outperformance against the dollar. USD/JPY closed at 106.74.

This morning, several Asia (Japan, Mainland China, South Korea) are closed for regional holidays. Most markets that are open join the late session rebound on WS yesterday. The off-shore yuan rebounds modestly after the recent sell-off (USD/CNH 7.12 area). The Reserve Bank of Australia left its policy unchanged. The Bank reiterated that it won’t raise rates until inflation is sustainably on target and until employment is making progress to full employment. This won’t be fulfilled anytime soon. Even so, the Aussie dollar remains most of its recent gains with AUD/USD trading in the 0.6450 area. The yen again slightly outperforms, despite in a risk-on context (USD/JPY 106.60 area).

Today, the eco calendar is thin, with the US services PMI and the non-Manufacturing ISM the exception to the rule. The surveys will register the full impact of the lockdowns an probably print at highly distressed levels. However with markets focus on a gradual reopening of the economy, the FX reaction might be most. Today, a German Court will rule on the ECB APP programme. Any limitations on the ECB’s room of manoeuvre might cause some nervousness on European markets and the euro, but we assume that a workable solution will be found.

EUR/USD regaining the 1.09 area slightly improved the ST picture, but yesterday’s price action illustrates that sentiment remains fragile. For now, we see no compelling reason for a sustained EUR/USD rally. We expect more consolidation in the 1.0727/1.1018 range. A better risk sentiment might slow yesterday’s EUR/USD decline today.

Sterling initially remained in the defensive yesterday, with EUR/GBP filling offers north of 0.88. However, an improvement in global markets sentiment finally reversed earlier sterling losses. For now sterling is still mainly driven by global sentiment rather than UK-specific news. The day-to-day momentum might stay EUR/GBP negative, but the 0.8675/0.87 remains a solid support after the recent sterling rally.