10-Aug-2020

1) EUR/USD: Bear attack on 1.17? Three reasons why the dollar may extend its gains
2) USD Strengthens On The Back Of Payrolls Report
3) FTSE Rallies On Global Economic Recovery Optimism

 

 

1) EUR/USD: Bear attack on 1.17? Three reasons why the dollar may extend its gains

Bears do not bath on the beach in August – the world’s preferred month for vacation tends to be everything but relaxed in financial markets. EUR/USD has stalled its upward move in what seems like more than a correction.

Taiwan’s defense ministry has confirmed that a Chinese fighter jet crossed the median line of the Taiwan Strait early on Monday seemingly in response to the visit of US Health Secretary Alex Azar in Taipei. Any American recognition of the island nation – which China sees as its own – angers Beijing.

Tensions around Taiwan follow the ongoing clash around Hong Kong. Jimmy Lai, a prominent Hong-Jong media mogul, was arrested under the new security law that China imposed on the city-state. Beijing is tightening its grip, in a move that seems to be response to American sanctions against Carrie Lam, Hong Kong’s leader.

The world’s largest economies are also clashing on technology, most recently around TikTok. Nevertheless, the Phase One trade deal remains intact – and that is what matters to markets. Negotiators from the world’s largest economies will meet late in the week to take stock of the deal.

Investors are certain the US and China will stick to the accord – yet China hinted it is in danger. Any nasty surprise may shake confidence and could boost the safe-haven dollar.

Talks between Republicans and Democrats on the next relief package broke down on Friday amid various disagreements. President Donald Trump followed with four executive orders, most notably announcing $400/week in federal unemployment benefits, lower than $600/week previously provided.

It is unclear if these orders can withstand court scrutiny – as the power of the purse belongs to Congress. However, his move was an attempt to break the impasse. Talks are set to resume at some point, with aid to states being one of the most contentious points.

The chances of a large, $3 trillion package that Democrats aimed for, is diminishing. The opposition party was already willing to compromise and lower it to $2 trillion, halfway to the $1 trillion frameworks the ruling party aimed for.

Moreover, the relatively upbeat Non-Farm Payrolls report – showing a better than expected gain of 1.763 million workers in July – may lower pressure for action. Despite beating estimates, the pace of job restoration has significantly slowed and 13 million Americans are still out of work.

One of the factors propelling EUR/USD to the highest in two years was Europe’s better coping with coronavirus. COVID-19 flareups seem to remain small but are less localized than beforehand.

On the other hand, the US case curve is now clearly leaning lower, while the pace of new deaths from the disease is also showing tentative signs of dropping.

The situation in America remains worse than in Europe, but that gap is narrower – and may weigh on the currency pair.

Euro/dollar has lost its upward momentum on the four-hour chart and fell under the 50 Simple Moving Average – both bearish signs. Critical support is at 1.17, a support line from late July, and also where the 100 SMA hits the price.

Ahead of 1.17, EUR/USD has some support at 1.1750, Friday’s low. Further down, 1.1630 and 1.1545 await the currency pair.

Resistance is at 1.1815, a support line from last week, followed by 1.1820, a temporary separator of ranges. The two-year high of 1.1915 is the upside target.

 

2) USD Strengthens On The Back Of Payrolls Report

The euro currency ended in the red on Friday price action fell back to test the familiar support area near 1.1750.

The declines came following an attempt to breakout above the previous highs near 1.1900.

For the moment, we see a confluence of the rising trend line and the horizontal support. This could offer some rebound in prices.

The Stochastics oscillator is also in the oversold level which suggests that price may rebound.

Price action in GBPUSD indicates a possible move lower. After a brief close above the 1.3122 resistance level, the cable closed lower on Friday.

This also shows a breakdown of the rising trend line. In the short term, we might expect GBPUSD to push lower to the support area near 1.3000 level of support.

But a close below this level could suggest some more declines. The next main support area is near the 1.2750 level.

There is a possibility that GBPUSD could settle within the range of 1.3000 and 1.3122.

Crude oil prices gave back the gains to settle lower on Friday. After the previous move above the 42.00 handle, crude oil pared gains.

After moving back into the range, oil prices briefly touched the 41.00 handle before a slight rebound into the close.

This puts oil prices back within the range of 42 and 41. The sideways consolidation is unlikely to end anytime soon unless backed by strong fundamentals.

Meanwhile, if WTI loses the 41.00 handle, then we expect a move back lower to the 37.5 – 38.00 region which was tested earlier in the week.

The precious metal gave back some of the gains on Friday after price reached a new all-time high last week.

Gold prices were trading above the 2050 handle rather comfortably. However, price lost out into the close to settle near the 2031 level.

While it is too early to understand if the trend will start a correction, watch out for the clues.

A possible lower high formation and a breakout from the rising price channel could indicate just that.

However, the bullish momentum in the precious metal is also strong which might suggest that this is just a small pullback to the uptrend.

 

3) FTSE Rallies On Global Economic Recovery Optimism

If EURUSD loses the 1.1750 handle, then we expect price to extend lower to the 1.1600 level where we have the next main support level.

The FTSE, along with its European peers are pointing to a stronger start, boosted by upbeat data from the US and China. However, gains could remain capped in a quiet day for corporate releases and as the focus remains on US lawmaker’s ability to agree additional stimulus.

China’s consumer inflation accelerated for a second straight month in July. The CPI inflation gauge grew 2.7% yoy in July, up from 2.5% in June. On a monthly basis, prices increase 0.6%. Official data also showed that PPI which measures inflation at factory level rose 0.4% month on month.

The data adds to mounting evidence that the economic recovery in China is not only solid, but also gaining momentum, boosting optimism that the world’s second largest economy will offer serious support to the global economic recovery.

The data comes following Friday’s better than forecast non-farm payroll data. 1.7 million new jobs were created in the US in July and after President Trump signed executive orders over the weekend to extend unemployment benefits after Democrats and Republicans failed to agree a deal. Negotiations between the two parties are set to continue on Monday.

Concerns over rising US – Sino tensions are likely to weigh on sentiment, keeping gains in check. On Friday Trump signed executive orders banning TikTok and WeChat whilst also sanctioning Hong Kong’s Carrie Lam. China has since arrested Jimmy Lai a pro-democracy media mogul angering the US. Most importantly for the markets this week US – China negotiators will meet to assess progress in the Phase 1 trade deal. This is what the market is really interested in. So far, Trump is driving a hard line on China heading towards the US elections.

Oil is pushing higher on Monday, extending last week’s gains, boosted by upbeat data from the US and China and by a bullish demand picture from Saudi Aramco, the largest oil producer in the world. State owned Aramco’s chief executive said that oil consumption in Asia, Aramco’s biggest market has almost returned to pre-covid levels. As economies across the rest of the globe continue to re-open he sees a similar pattern emerging. The rosy demand outlook, combined with Iraq saying iit will cut production by a further 40,000 barrels a day to compensate overproduction over the past three months are overshadowing the stimulus deadlock in Washington, at least for now.