06-Aug-2020

1) Gold Price: XAU/USD Correction On The Cards Ahead Of The US NFP?
2) AUD Tests 0.7250 Amid Ongoing USD Under Performance
3) USD/JPY: At Risk Of Losing The 105.00 Threshold
4) Bank Of England Leaves Rates Unchanged – Tweaks Forecasts

1) Gold Price: XAU/USD Correction On The Cards Ahead Of The US NFP?

The meteoric rise propelled Gold (XAU/USD) to fresh all-time highs of $2055 on Wednesday, as investors continued to find value in the bullion amid the US dollar meltdown and record low real Treasury yields. Disappointing US private sector ADP jobs report added to the concerns of a downbeat Non-Farm Payrolls (NFP) report due this Friday and exacerbated the pain in the buck. Meanwhile, expectations of US stimulus deadlock likely to be overcome soon also boosted the yellow metal. The haven demand for the metal was buoyed by the continued surge in the coronavirus cases globally, with over an 18.66 million tally reported a day. The virus fears continue to temper the economic rebound expectations.

Looking ahead, the yellow metal will remain at the mercy of the US dollar dynamics and fiscal stimulus negotiations. Investors await the Bank of England (BOE) monetary policy decision, with any hints on further stimulus, by way of QE expansion or negative interest rates, will likely benefit the non-yielding gold. Also, the US Jobless Claims could have a significant impact on the gold trades, as all eyes remain on the US NFP.

As observed in the four-hour (4H) chart, XAU/USD faced rejection on a few occasions at the two-week-long rising channel resistance near $2056 region. Therefore, a correction looks likely on the cards, as also suggested by the bearish price-Relative Strength Index (RSI) divergence.

In addition, the daily RSI is highly overbought and thus, backing the case for pullbacks. However, the overall bias remains bullish and therefore, every dip in the bright metal is likely to be bought in and spot could retest the record highs. The bullish bias remains intact as long as the spot holds above the 21-4H Simple Moving Average (SMA) at $2001.

2) AUD Tests 0.7250 Amid Ongoing USD Under Performance

The AUD continued to test new highs through trade on Wednesday, pushing back through 0.72 amid hopes a COVID-19 vaccine will be available sooner than first estimated. Having struggled to break above 0.7180 through the domestic session the AUD found support overnight, surging to intraday highs at 0.7251 before profit taking overwhelmed the upturn and the currency corrected lower into this morning’s open. Risk demand was boosted by reports Novavax stage one trials had induced a positive antibody response, while new treatment methods in the US have seen a reduction in mortality rates by up to 50%. Hopes for a cure and a strong round of corporate earnings results, coupled with expectations US lawmakers will reach an agreement on Fiscal Stimulus by the end of the week helped fuel the risk on mood and underpinned the AUD upturn.

Attentions remain affixed to swings in risk sentiment with US fiscal policy the biggest item on the agenda through the latter half of this week. The AUD remains impervious to increasing domestic border restrictions and the continued uptick in new cases in Victoria. Markets have priced in the downturn that will inevitably result from Melbourne and Victoria second lock down and are instead looking for a robust rebound in growth through 2021.

Having struggled to sustain moves above 0.7230 we are seeking a sustained break above this handle as a marker for further upside.

The USD was the days big loser, tumbling against a basket of major counterparts amid a sustained risk on mood and expectations of US under performance when valued against other major economies. The dollar index fell back below 93 and stopped short of a break below 92.50, nearing last week’s two year low. Fears US lawmakers will be unable to reach a deal for COVID-19 relief by the end of the week are mounting as partisan differences delay talks. Democrats and Republicans are at loggerheads when it comes to agreeing the size, scale and direction of stimulus support and have earmarked Friday as a deadline for reaching a deal. If a compromise cannot be found talks will likely be abandoned for now, posing a real risk of deepening economic pressure across the US.

The Euro and GBP both advanced through trade on Wednesday, largely on the back of USD weakness. The single currency moved back above 1.1850 to test a break above 1.19 while GBP jumped through 1.31 to touch intraday highs at 1.3160. Attentions remain affixed to US lawmakers and ongoing fiscal stimulus updates as the primary driver of short-term direction.

3) USD/JPY: At Risk Of Losing The 105.00 Threshold

The persistent dollar’s weakness sent USD/JPY to a daily low of 105.31, although the pair trimmed most of its intraday ahead of the close, now trading around 105.60. The solid performance of equities and an uptick in government bond yields limited the intraday decline. Yields were up amid moderate optimism the US Congress may reach an agreement on the next coronavirus aid-package by the end of the week. Still, the American currency remained out of investors’ radar, as macroeconomic data continued to signal a steeper economic deterioration throughout July.

At the beginning of the day, Japan published the July Jibun Bank Services PMI, which came in at 45.4, from 45 in the previous month. The country’s macroeconomic calendar will offer minor money-related data this Thursday.

The short-term picture for USD/JPY shows that the risk is skewed to the downside. In the 4-hour chart, the pair has extended its decline below a still bullish 20 SMA, although the larger ones are gaining bearish strength above it. Technical indicators, in the meantime, stand within negative levels, the RSI directionless but the Momentum heading firmly lower after a failed attempt to regain positive territory. Further declines are to be expected on a break below the mentioned daily low, with scope then to test the 104.50 price zone.

4) Bank Of England Leaves Rates Unchanged – Tweaks Forecasts

There was no surprises from today’s Bank of England rate meeting as the central bank left monetary policy unchanged, citing an unusually uncertain economic outlook, and an unemployment rate of 7.5% by year end.

They did tweak their policy forecasts for GDP and inflation, revising the economic damage for the lockdown to the downside for this year to -9.5% from -14.5%, however they also modified the extent of the economic rebound in 2021 to the downside as well, from 15% to 9%.

Its inflation forecasts were more noteworthy, projecting 0.25% CPI for 2020, and then a sharp recovery to 1.75% in 2021. This stands in stark contrast to their May predictions of 0.6% and 0.5% respectively. This seems a stretch, if as they predict unemployment stays high, and the recovery is as muted as they say.

If anything, their unemployment targets may be a little on the optimistic side, along with their predictions of the strength of any recovery. Their predictions for credit losses of around £80bn also seem a little on the low side, given the potential for future localised outbreaks and lockdowns.

The central bank also continued to flog the dead horse of negative rates, saying that they continued to monitor the sustainability of negative rates.

We already know from the experience of Japan and Europe the damage negative rates does to the banking system overall, and the UK with its huge financial sector is unlikely to be any different. If anything negative rates could weaken the UK financial sector even further, thus destabilising the economy even more.

In any event there was nothing particularly dovish about any of these comments with the pound only slightly firmer, just below the March peaks at 1.3200.