06-Nov-2020

1) The US Payrolls Will Take Center Stage Today
2) EUR/USD: Bulls Turn Cautious Near 1.1860-70 Supply Zone, Focus On US Politics/NFP
3) GBP/USD: Move Beyond 1.3160-70 Supply Zone To Set The Stage For Additional Gains

1) The US Payrolls Will Take Center Stage Today

The ‘post-US election’ rally continued yesterday as markets continued to embrace the idea that some kind of political status-quo (Biden president but with a divided Congress) shouldn’t be that bad for risky assets/US stocks in particular. US equities again took a strong start but momentum eased a bit further out in the session. Still, US indices closed with nice gains of 1.95% (S&P/Dow) to 2.59% (Nasdaq). European markets also joined the risk rally gaining mostly between 1.5% and 2.0%. The European Parliament reached an agreement on the so-called rule of law conditionality to the €750bn recovery fund was supportive for European assets. Core yields initially declined a bit further, but gradually found a bottom as the reversal of the revelation traded finally slowed. German yields closed the day less than 1 bp higher. US yields ended the day little changed with the very long end still slightly outperforming (-1.7bps). The Fed policy meeting didn’t bring much high profile news for markets. The Fed left its policy rate and the pace of asset purchases unchanged. The Fed still can change the parameters of the APP if necessary. Fed’s Powell reiterated the importance of fiscal policy to support the recovery. On the FX market, the dollar stayed in the defensive (risk-on) while at the same time the euro was in better shape (removal of the rescue fund hurdle)too. EUR/USD jumped well north of 1.18 (close 1.1826). Dollar weakness was illustrated by a forceful break lower in USD/JPY (close 103.49) with yen strengthening despite the risk-on. EUR/JPY showed a more balanced picture, reversing an earlier rebound (close 122.40). Sterling showed no clear directional trend intraday, despite the BoE stepping up bond purchases by a bigger than expected £150bn and Fin Min Sunak taking additional measures to mitigate the impact of the new corona wave. EUR/GBP closed near the 0.90 pivots.

This morning, Asian equity indices show a mixed picture with China underperforming and Japan outperforming (despite a strong yen). The Yuan is holding on to the gains against the dollar (USD 6.62) after a strong performance yesterday. The yen shows a similar picture (USD/JPY 103.50). The EUR/USD rally is taking a breather.

The ‘outcome’ of the US presidential election remains a factor of uncertainty. However, a Biden win with a divided Congress should be more or less discounted (even if the Senate remains a close call). With respect to the data, the US payrolls will take center stage. A further gradual improvement is expected with 593 000 additional jobs, the unemployment rate expected to decline from 7.9% to 7.6%. The participation rate also remains an interesting variable. A negative surprise might further highlight the need for further fiscal support. The risk rally shifting into a lower gear and a potential negative surprise for the payrolls, in theory, are bond supportive. However, after the recent steep decline, we expect LT US and German yields to look for some kind of ST equilibrium. The German 10-y at least still didn’t break the -0.64% support in a sustainable way. A slowdown of the risk rally might give the dollar some reprieve. However, the picture remains USD heavy.EUR/USD 1.1881 is the next reference on the technical charts. We expected EUR/GBP to hover around the 0.90 pivots as long as there is no additional positive news on a Brexit deal.

2) EUR/USD: Bulls Turn Cautious Near 1.1860-70 Supply Zone, Focus On US Politics/NFP

The markets have been betting that Democrat candidate Joe Biden will become the next US president. That said, the final result remains unclear two days after polls closed on Wednesday and hangs on the vote count from few remaining battleground states. It is worth reporting that neither candidate, so far, has the required 270 Electoral College votes to win the White House. Adding to the high degree of uncertainty, Republican incumbent President Donald Trump has threatened to undermine the victory by challenging its legality in court. Meanwhile, a contentious US presidential election diminished hopes for large stimulus packages to support the economy any time soon.

Expectations for less fiscal spending led to some follow-through decline in the US Treasury bond yields, which, in turn, weighed heavily on the US dollar. Apart from US politics, a strong risk-on rally in the US equity markets further undermined the greenback’s relative safe-haven status and pushed the EUR/USD pair back above the 1.1800 mark. The euro bulls seemed rather unaffected by weaker German Factory Orders/EU Retail Sales data and the European Commission’s downwardly revised growth projections for 2021/22. In the Autumn European Economic Forecast, GDP growth for 2021 was revised down to 4.2% from 6.1% and was projected to slow further to 3.0% in 2022.

Meanwhile, the latest FOMC monetary policy decision failed to provide any respite to the USD bulls and turned out to be a non-event for the markets. Policymakers unanimously voted to leave the target federal funds rate range unchanged at 0.00-0.25% and continue expanding its balance sheet at the current pace. The decision was on expected lines as the US central bank preferred to stay sidelined this meeting in light of the November 2020 elections. Nevertheless, the pair shot to near two-week tops, albeit the momentum stalled a near two-month-old trading range resistance, around the 1.1860-70 region.

The pair now seems to have entered a bullish consolidation phase and was seen oscillating in a range through the Asian session on Friday. Market participants now look forward to the release of the closely-watched US monthly jobs report – popularly known as NFP. This, along with US political developments, will play a key role in influencing the USD price dynamics and produce some meaningful trading opportunities on the last day of the week.

From a technical perspective, bulls are likely to wait for a sustained move beyond the 1.1860-70 hurdle before positioning for any further appreciating move. Above the mentioned barrier, the pair seems all set to surpass the 1.1900 mark and test the next resistance near 1.1945-50 region. Some follow-through buying might now assist the pair to make a fresh attempt to conquer the reclaim the key 1.2000 psychological mark.

On the flip side, dips below the 1.1800 mark might now attract some buying near 50-day SMA, around the 1.1775 region. A subsequent fall could get extended towards the 1.1725-20 horizontal level, below which the pair could slide back towards challenging the 1.1610-1.1600 strong support. A convincing breakthrough will negate prospects for any near-term positive move and turn the pair vulnerable to accelerate the fall further towards the 1.1500 round-figure mark.

3) GBP/USD: Move Beyond 1.3160-70 Supply Zone To Set The Stage For Additional Gains

A combination of supporting factors assisted the GBP/USD pair to gain some strong positive traction on Thursday and rally over 220 pips from daily swing lows, around the 1.2930 region. The heightened US political uncertainty continued weighing heavily on the US dollar and helped limit the early slide. The markets have been betting that Democrat candidate Joe Biden will become the next US president, though the final result remains unclear and hangs on the vote count from few remaining battleground states. Apart from US politics, a strong risk-on rally in the US equity markets further dented the greenback’s relative safe-haven status.

On the other hand, the British pound got a strong lift after the Bank of England (BoE) refrained from cutting interest rates into negative territory and left it unchanged at 0.10%. The BoE also expanded its Asset Purchase Program by £150 billion to a total of £895 billion. The UK central bank further showed readiness to ramp up the stimulus again to combat the economic fallout from the second coronavirus-induced nationwide lockdown in the UK. Separately, the UK finance minister Sunak announced an extension of furlough scheme to the end of March. The pair easily surged past the 1.3100 mark and seemed rather unaffected by the FOMC decision.

The latest FOMC monetary policy decision failed to provide any respite to the USD bulls and turned out to be a non-event for the markets. Policymakers unanimously voted to leave the target federal funds rate range unchanged at 0.00-0.25% and continue expanding its balance sheet at the current pace. The decision was on expected lines as the US central bank preferred to stay on the sidelines in light of the November 2020 elections.

With investors looking past Thursday’s key central bank events, a modest pullback in the US equity futures helped ease the USD bearish pressure on Friday. This, in turn, prompted some selling around the pair during the Asian session, though the downside remains limited. In the absence of any major market-moving economic releases from the UK, investors will take cues from Friday’s release of the closely-watched US monthly jobs report – popularly known as NFP. Apart from this, US political developments will play a key role in influencing the USD price dynamics and produce some meaningful trading opportunities on the last day of the week.

From a technical perspective, the strong positive momentum stalled just ahead of a resistance marked by the 61.8% Fibonacci level of the 1.3482-1.2676 downfall. With technical indicators on the daily chart holding in the bullish territory and still far from being in the overbought zone, a sustained move beyond the mentioned barrier will be seen as a fresh trigger for bullish traders. The pair might then aim to surpass the 1.3200 mark and head towards testing the 1.3275 horizontal resistance. The momentum could further get extended towards the 1.3300 round-figure mark before the pair eventually climbs to early September daily closing highs resistance near the 1.3380-85 region.

On the flip side, any subsequent dip below the 1.3100 mark now seems to find some support near the 1.3080 region (50% Fibo. level). Failure to defend the mentioned support might prompt some technical selling and accelerate the fall back towards the key 1.3000 psychological mark en-route the 1.2980 region, or 38.2% Fibo. level.