07-Oct-2020

1) Trump Calls Off Talks On Stimulus Plan Until After Election
2) XAU/USD: Gold Looks South As US Dollar Cheers Stimulus Gloom
3) GBP/USD: Turns Vulnerable After Trump Cancels Talks On Stimulus Package
4) EUR/USD: Bulls At The Mercy Of USD Price Dynamics, 1.1700 Mark Holds The Key

1) Trump Calls Off Talks On Stimulus Plan Until After Election

US recorded the highest trade deficit in 14 years (of USD 67bn in August), underscoring the recovery in economic activity. The overall risk sentiment was holding up until Trump said he was holding back the talks on fiscal stimulus until after the election.  The yield on the US 10y bond touched the highest level since June this year but retreated post president Trump’s comment. US real rates rose as inflation expectations plummeted as hopes of a fiscal stimulus deal getting done anytime soon got extinguished. Higher US real rates caused the US Dollar to strengthen across the board. There was a dramatic reversal in US equities intraday.

President Trump’s comments came in just a few hours after Federal Reserve chairman Jerome Powell emphasized the need of action on the fiscal front yet again in his speech saying the US economic recovery would be weak without additional fiscal support from the government.

The government has nominated three independent MPC members; Jayanth Varma, Ashima Goyal and Shashank Bhide. The MPC meet that was initially scheduled for 1st Oct and had got deferred is now scheduled to take place from 7-9th October. It is believed that there could be a dovish tilt in the MPC considering the past views of the newly appointed MPC members.

Domestic equities have staged a tremendous recovery with Nifty breaching the 11650 mark. 11820 is expected to be a crucial resistance for the Nifty. The Rupee continues to follow a similar trading pattern. Nationalized banks aggressively buy the dips to 73.10-73.15 and buy all the way up to 73.45-73.50. Considering the fact that FDI related inflows are lined up and the reaction function of nationalized banks, we expect the Rupee to continue trading in the 72.90-73.90 range. Bond market continues to remain jittery given the supply that is lined up. Yields on 10y SDLs (which are considered virtually risk free) are 30-40bps higher than yields on AAA PSU bonds!!! The spread between the 10y GOI benchmark bond and 10y SDLs which was around 60bps until not too long ago has widened to over 100bps now given uncertainty around how states would be compensated for GST shortfall.

2) XAU/USD: Gold Looks South As US Dollar Cheers Stimulus Gloom

The latest tweet from US President Donald Trump on stimulus early Wednesday saved the day for the gold bulls, as Gold (XAU/USD) attempts a tepid bounce from weekly lows of $1874. Trump called on for partial stimulus, urging Congress to approve paycheck protection and airline support. The sentiment received a fresh lift propping the Asian equities while the US dollar stalled its overnight rally.

Despite gold’s pullback, the path of least resistance remains to the downside, as the safe-haven dollar will likely remain in demand amid fresh concerns on the US economic recovery, in the wake of no prospects of fiscal stimulus until after the US elections. Also, markets would favor the US currency ahead of the Fedspeak and FOMC minutes, keeping the gold bulls at bay.

Late Tuesday, President Trump rejected House Speaker Nancy Pelosi’s $2.4 trillion fiscal aid offer, which triggered a fresh risk-aversion wave across the financial markets. Gold tumbled in tandem with the Wall Street stocks amid resurgent demand for the greenback, as a safe-bet.

Looking at gold’s hourly chart, the price seems struggling to extend the recovery momentum from weekly lows, with the immediate upside barrier seen at horizontal 200-hourly Simple Moving Average (HMA), currently at $1890.

Acceptance above the latter would expose the bearish 21-HMA at $1895. The next critical resistance awaits at $1902, the confluence of the 50 and 100-HMAs.

Alternatively, a failure to defend the weekly lows of $1873, the next robust support at $1860 will be put to test, which is the 100-day Simple Moving Average (DMA).

The hourly Relative Strength Index (RSI) trades flat around 33.40, after bouncing from the oversold territory, suggesting that there is more scope to the downside.

3) GBP/USD: Turns Vulnerable After Trump Cancels Talks On Stimulus Package

The GBP/USD pair faced rejection near the key 1.3000 psychological mark and witnessed an intraday turnaround from three-week tops. The British pound took a hit on the back of reports that the EU has no plans to offer concessions to the UK Prime Minister Boris Johnson before next week’s Brexit deadline. The EU is betting that Johnson won’t make good on his threat to walk out without a deal and is ready to let UK talks drag on into November or December, the report added further. According to a senior EU diplomat, the bloc could even take a chance on Johnson pulling the plug on the deliberation rather than compromise on its red line.

The selling pressure aggravated further in reaction to the US President Donald Trump’s abrupt decision to cancel talks with Democrats on the economic stimulus package to boost the coronavirus-hit economy. Trump’s surprise move fueled concerns about the already shaky US economy and triggered a steep decline in the US equity markets. This, in turn, forced investors to take refuge in the US dollar’s safe-haven status, which further contributed to the pair’s sharp fall of around 140 pips from the daily swing highs. The pair finally settled near the lower end of its daily trading range, albeit lacked any follow-through and regained some traction on Wednesday.

The pair bounced back to the 1.2900 mark during the Asian session. In the absence of any major market-moving economic releases, either from the UK or the US, the broader market risk sentiment will influence the USD price dynamics and provide some impetus. Later during the US session, the release of the latest FOMC meeting minutes will also be looked upon for some meaningful trading opportunities.

From a technical perspective, the recent positive momentum stalled near a strong resistance marked by the 38.2% Fibonacci level of 1.3482-1.2676 recent downfall.  A subsequent slide below the 1.2930 confluence support might have already set the stage for a further near-term depreciating move. That said, bearish traders might still wait for some follow-through selling below the overnight swing lows, which coincides with the 23.6% Fibo. level, around the 1.2865 region, before placing fresh bets. The pair might then turn vulnerable to accelerate the slide towards the 1.2800 mark before eventually dropping the next major support near the 1.2765-60 horizontal zone.

On the flip side, any meaningful recovery attempted now seems to confront stiff resistance and remain capped near the mentioned confluence support breakpoint – comprising of 100-hour SMA and over one-week-old ascending trend-line. A sustained move beyond will negate the bearish bias and prompt some short-covering move, which should assist the pair to make a fresh attempt to conquer the 1.3000 mark.

4) EUR/USD: Bulls At The Mercy Of USD Price Dynamics, 1.1700 Mark Holds The Key

The EUR/USD pair edged higher during the first half of the trading action on Tuesday and climbed to fresh two-week tops, albeit struggled to find acceptance above the 1.1800 mark. The pair witnessed an intraday turnaround amid a sudden pickup in the US dollar demand after the US President Donald Trump abruptly broke off talks on economic stimulus negotiations with Democrats. Trump’s surprise decision resurfaced worries about the downside risk for an already shaky US economy and spoofed investors. This was evident from a steep decline in the US equity markets, which, in turn, drove haven flows into the greenback.

The shared currency was further weighed down by the ECB President Christine Lagarde’s comments, saying that Europe’s economic recovery is incomplete, uncertain, uneven. Lagarde also raised concerns that the containment measures that have to be taken by authorities will have an impact on this recovery. So, instead of a V-shape rebound, we fear that it might have that second arm of the V a little bit shakier, Lagarde added further. Lagarde reiterated that the ECB is very attentive to exchange rate developments. Nevertheless, the pair retreated around 75-80 pips from daily swing highs and settled near session lows.

The pair now seems to have stabilized below mid-1.1700s and was seen oscillating in a range through the Asian session on Wednesday, failing to benefit from a positive tone in the equity markets. Market participants now look forward to the release of German Industrial Production figures for some impetus. Apart from this, a scheduled speech by the ECB President Christine Lagarde will influence the shared currency. Later during the US session, the release of the FOMC meeting minutes, along with the broader market risk sentiment will be looked upon to grab some meaningful trading opportunities.

From a technical perspective, the pair, so far, has managed to defend a one-month-old descending trend-channel resistance breakpoint. Any subsequent dip is likely to find some support near the 1.1700 mark, representing the 23.6% Fibonacci level of the 1.2011-1.1612 downfall. That said, some follow-through selling will negate prospects for any further near-term appreciating move and turn the pair vulnerable to slide back towards the recent swing lows support, around the 1.1615-10 region.

On the flip side, the 38.2% Fibo. level, around the 1.1765-70 region, now seems to act as immediate resistance. This is followed by the 1.1800-10 region (50% Fibo. level), which if cleared decisively will set the stage for additional gains. The pair might then accelerate the momentum towards the 61.8% Fibo. level, around the 1.1865 region, before eventually aiming back to reclaim the 1.1900 round-figure mark.