07-May-2020

1) BoE & M&A Activity in Busy Start to Thursday
2) Case for Gold Bulls Remain
3) EUR/USD Gains Are Likely To Be Limited

1) BoE & M&A Activity in Busy Start to Thursday

Here on the FTSE news that the BoE is keeping monetary policy unchanged, in addition to some much-needed M&A action is keeping the mood buoyant ahead of the open.

After significant action from the BoE over the past 2 months, Andrew Bailey & Co. voted to keep monetary policy unchanged, in a moved applauded by the markets. GBP/USD, jumped 0.2% to a session high of US$1.2377 after the BoE voted 7-2 to keep rates unchanged. The fact that only two members dissented is being viewed as pound positive.

Early on in the coronavirus crisis, the BoE cut interest rates twice to a record low of 0.1%, it also increased its QE programme by £200 billion. The BoE is following in the path of the Fed and the ECB, taking stock of where it stands after significant action. The central bank will want to see how the action taken so far supports the UK as it gradually eases out of lock down.

Andrew Baily, the BoE governor of the BoE repeated that the bank stands ready to ease further.

The Pound has managed to hold those gains even after a dark outlook for the UK economy from the central bank. Forecasts of a -14% contraction in GDP, expectations of higher unemployment and a tepid recovery which could drag into next year. Inflation is expected to slip below 1%.

Given such dire projection, more QE is almost a given, its just a matter of time.

Attention will now turn towards Boris Johnson and his exit strategy, which is expected to be announced on Sunday.

A deal between Virgin Media and Telecom (o2) could stir up M&A interest something that the markets have been starved of in recent weeks. Telefonica SA and Liberty Global have reached a deal to create the UK’s largest phone and internet operator, worth £38 billion. This deal allows two middle of the road assets to turn into a fully-fledged competitor to BT internet.

Looking ahead, attention will turn to US initial claims data. Expectations are for a further 3 million Americans to have filed for unemployment insurance in the week of 1st May. This will take the total to 33 million, or 20% of the US labour force in just 7 weeks, as the coronavirus crisis reaches further into the labour market. Whilst this week would represent a 56% decline from the top is still shockingly high, particularly given that several states have lifted lockdown restrictions and that the highest level of initial claims reached during the financial crisis was 665,000.

Whilst the shocks of the earlier releases have passed, these figures will need to be digested on top of yesterday’s 20.2 million private sector job losses and ahead of tomorrow’s non-farm payroll.

2) Case for Gold Bulls Remain

The surge in gold still looks well set to continue. A test of $1800 is the next big round number in sight and looking at the XAUUSD chart technically we can see gold coiling up on the daily chart and looking set to break higher. Typically when we see price coiling in this way it is just before an explosive breakout.

The fundamental outlook is good for gold to go higher over the next few months. Latest data from the World Gold Council show that global holdings of gold backed ETF’s have just hit a record high.

Gold ETFs saw the highest quarterly inflows for four years amid global uncertainty and financial market volatility. Holdings of these products reached a record high of 3,185t by the end of Q1.

Looking in more detail at the World Gold Council’s Q1 data shows some interesting detail. Over the course of Q1 2020 understandably we have seen less jewellery purchases. No-one wants to or has been been able to go jewellery shopping. A key takeaway for me here is that once lockdowns are lifted we can expect to see jewellery demand rise again. That, in conjunction, with more ETF buying should push gold demand much higher for the next quarter.

You could buy gold ETF. That saves the issue of leverage if you buy in real money.

Another option would be to buy at market here with stops below $1636 and look for the break of the daily coil.

A rise in fear and heavy equity selling will result in gold moving lower. Although gold is normally a safe haven and would rise in a crisis, this is not the case when the crisis is extreme. If you look back to 2008/2009 you can see that gold prices initially moved sideways and lower as the crisis unfolded. Around the COVID19 crisis it has been the same. When equity markets sell off heavily, gold falls and the USD rises. So, any big shocks could keep gold moving sideways or cause it to fall. Aside from that, any further falls in volatility, that is a calming of the markets, will support higher gold prices medium term. At the moment the case for gold bulls is outweighing that of the bears.

3) EUR/USD Gains Are Likely To Be Limited

EURUSD we wrote: Shorts at first resistance at 1.0870/80 re-target 1.0840/30, perhaps as far as 1.0815/05 for some profit taking.

We hit the target but over ran to 1.0780 in the sideways trend.

USDCAD continue sideways, which does not make trading very easy. We wrote: holding key support at 1.4040/30 today re-targets 1.4065/70 in the sideways trend, with first resistance at 1.4100/20. A break higher re-targets 1.4160/65…

Nice call as we shot higher from to 1.4020 hitting all targets to 1.4160/65.

EURUSD gains are likely to be limited with minor resistance at 1.0810/20 then a selling opportunity at 1.0830/40 with stops above 1.0850. Try shorts again at 1.0870/80 with stops above 1.0895.

A break below 1.0780 targets 1.0765/55 & minor support at the April low at 1.0730/25 for some profit taking on shorts. A break below is the next sell signal.

USDCAD higher as predicted to 1.4160/65, perhaps as far as 1.4195/99 today. Further gains meet strong resistance at 1.4260/70. Shorts need stops above 1.4300.

A dip from 1.4160/65 meets minor support at 1.430/20 with better support at 1.4100/1.4090.

Longs need stops below 1.4070. A break lower is a sell signal targeting 1.4040/30. Try longs with stops below 1.4000.