09-Oct-2020

1) XAU/USD: Gold Eyes Friday’s Close, US Stimulus Hopes Down The Dollar
2) GBP/USD: Ready To Fall From The Highs? Four Reasons To Sell Sterling
3) Europe Points To Higher Open As US Stimulus Is Back On, UK GDP Disappoints

1) XAU/USD: Gold Eyes Friday’s Close, US Stimulus Hopes Down The Dollar

Gold (XAU/USD) extends its bullish momentum into a third straight day on Friday, finally breaking through the $1900 mark while adding 1% on the day. The main catalyst behind gold’s rally remains the persistent downward pressure on the safe-haven US dollar, as the stimulus hopes continue to underpin the investors’ sentiment alongside the global stocks. House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin restarted the stimulus talks Thursday after President Donald Trump rejected Pelosi’s $2,4 trillion stimulus offer late Tuesday.

Meanwhile, Trump’s likely return to the public engagements combined with hopes of a Joe Biden win at the November Presidential election bolsters the market mood, adding to the weight on the greenback. A Biden presidency could imply the likelihood of a large stimulus package. In evidence of increased investor confidence in the bright metal, Gold-backed exchange-traded funds (ETFs) amassed over 1,000 tonnes of bullion in the first nine months of 2020.

Towards the weekly closing, the optimism over the US stimulus and sentiment on Wall Street will continue to influence the dollar trades, in turn, impacting the USD-denominated gold. Note that the price briefly regained the $1900 level on Thursday but failed to settle above the latter.

The technical set up for gold looks interesting, with the price on the verge of confirming a falling wedge breakout should it close Friday above the falling trendline resistance at $1909.

At that level, the 21-Daily Moving Average (DMA) also coincides, making it imperative for the bulls to battle it out. Backing the case for the bullish move, the 14-day Relative Strength Index (RSI) has pierced through the midline, currently trading at 50.28.

On a bullish breakout, the immediate resistance of 50-DMA at $1939 could test the bulls’ commitment, as the metal heads towards the record highs of $2075.

Alternatively, the bears could regain control on a failure to validate the pattern, opening floors for a retest of the critical 100-DMA support at $1862.

2) GBP/USD: Ready To Fall From The Highs? Four Reasons To Sell Sterling

Is cable mounting its last climb? GBP/USD is trading closer to the top of the range, buoyed by hopes for US fiscal stimulus. President Donald Trump backtracked on canceling talks with Democrats after markets fell earlier in the week, and is now pushing them higher with the willingness to compromise. In turn, the safe-haven dollar is down. However, the pound has its own issues.

 While America’s potential relief package is still unknown, Britain’s less-generous furlough scheme is already priced into sterling. That is the first bearish factor.

Chancellor of the Exchequer Rishi Sunak is set to lay out a reduced program to aid employees who are unable to work due to the pandemic. The move was already made known a few weeks ago, and Sunak’s official announcement is unlikely to help the pound. Moreover, paying only two-thirds of salaries is set to hurt consumption.

The lower temperatures are forcing people to spend more time inside, and eroding support in the government may prompt people to flout social distancing rules. There may be other reasons for the increase in coronavirus cases, but the result is clear – rising pressure on the National Health Service.

The government is contemplating imposing new restrictions in the northwest, where the disease is spreading at a rapid clip. That implies reduced economic activity going forward.

Gross Domestic Product figures for August – when the mercury was higher – badly disappointed. Output grew by only 2.1%, contrary to expectations for more than double that amount. Moreover, July’s GDP statistic was revised down to 6.4%.

While these figures look robust in absolute terms, they come after a devastating drop in the spring. The chances that the Bank of England sets negative interest rates is growing.

 The saga continues with ups and downs – and Friday will likely be a down day. Chief EU Negotiator Michel Barnier tends to release updates on the talks at the end of the working week and he almost always downbeat. In any case, no breakthrough is likely before the EU Summit next week. London and Brussels remain at odds over state aid and fisheries.

Overall, optimism about the US stimulus is unlikely to keep cable afloat.

Pound/dollar is trading above the 50 and 100 Simple Moving Averages but suffers from downside momentum. The recent range trading has balanced the technical picture.

Support awaits at 1.2885, which was a low point on Thursday, and it is followed by 1.2850 and 1.28.

Resistance is at 1.2975, Thursday’s high, followed by the all-important 1.30 level. The next line to watch is 1.3050.

3) Europe Points To Higher Open As US Stimulus Is Back On, UK GDP Disappoints

A strong finish on Wall Street boosted Asian markets to an almost 2.5 year high and is lifting European markets on the open. US stimulus optimism is overshadowing disappointing UK GDP data and rising covid numbers.

A U-turn by Trump and talk of progress by House Speaker Nancy Pelosi in negotiations towards securing a large-scale fiscal stimulus package is driving a risk on rally. The improving mood in the market is boosting demand for riskier assets such as stocks, whilst dragging on demand for the US Dollar.

Recent data is highlighting the stalling nature of the US recovery. Yesterday’s US jobless claims showed that 840K Americans signed up for unemployment benefit for the first time. This was only 9K down from the previous week and 20k higher than forecast. The labour market recovery is running out of steam and requires additional stimulus for the recovery to continue.

Adding to the risk on mood, the market is increasingly pricing in a Democratic win by Joe Biden. Whilst typically Democrats are considered less market friendly than Republicans, Democrats are supportive of a huge stimulus package. So even if covid relief aid doesn’t get agreed by the November 3rd election with Biden increasingly looking to take the keys to the White House, the prospect of a huge deal thereafter is adding to the upbeat mood.

UK GDP grew at just 2.1% in August compared to July. This was down from 6.6% growth in July and missed forecasts of 4.6%. This is a surprisingly weak reading and suggests that the economy is doing worse than feared. The British economy only managed relatively weak growth compared to the previous month despite the government’s continued furlough programme and Brits gorging themselves on the Chancellor’s Eat Out To Help Out scheme. The rebound was clearly already running out of steam in August which doesn’t bode well for the coming months

With the resurgence of covid infections there is a good chance that the economic rebound from April’s record -20.4% will slow further. Lockdown restrictions are being tightened and more restrictive measures could still be applied over the coming weeks and months as the number of cases continue to surge. Add into the mix the replacement of the furlough scheme with a less generous successor means unemployment is also expected to rise. All in all, we are looking towards particularly and dark challenging Autumn and Winter months.

The Pound has given up earlier gains versus the broadly weaker dollar and is turning negative in reaction to the depressing statistics. The FTSE is holding mild gains.