11-Aug-2020

1) EUR/USD: King Dollar’s Comeback Seems Unstoppable, And For Good Reasons
2) USD/JPY Closed A Choppy Trade Session Unchanged Near The 106 Pivot
3) The Unemployment Rate In Britain Remains Defiantly

1) EUR/USD: King Dollar’s Comeback Seems Unstoppable, And For Good Reasons

The tables have turned – King dollar is back with a vengeance after a long period of decline. Upbeat US Non-Farm Payrolls may have supported the world’s top currency early in the week, and now it is the lack of progress in Washington that can be mostly attributed to the greenback’s advance.

While Republicans and Democrats are willing to resume negotiations on the next fiscal package, they have yet to set a time for talks. Moreover, President Donald Trump’s executive orders are not only failing to urge lawmakers to act – they may be useless.

Most importantly, federal unemployment benefits – decreed at $400/week by the White House – are conditioned on $100/week from states. However, states’ high debt levels – originating from before and exacerbated during the pandemic – may prevent such support. Moreover, it is unclear if executive action has legal standing.

In the meantime, Trump seems enamored with the power of the pen, and he is touting a capital gains tax cut – reversing his position. While that is boosting stocks, it does not diminish flows to the safe-haven dollar. Lower US fiscal spending means a stronger dollar.

Another boost to the greenback comes from the latest US coronavirus figures – cases fell below 50,000 per day in Monday’s reporting. While the most recent decline is attributed tot he “weekend effect,” the trend is clearly to the downside.

That contrasts with the trend in the old continent, which is to the upside. Germany’s COVID-19 reproduction rate has been consistently above 1, worrying health officials. Overall, Europe’s coronavirus situation is currently far better than America’s but the direction of travel is changing.

An update on business sentiment is due out later on Tuesday from ZEW Economic Sentiment figures. A minor decline is on the cards for August after several months of rapid increases.

Elsewhere, Sno-American tensions remain elevated. Trump said that the trade deal “means very little” to him. His comments come ahead of a meeting between top trade officials from the world’s largest economies.

Investors have been able to shrug off worsening relations, but are sensitive to the trade deal. So far, they are taking Trump’s words as bluster, but if the accord falls apart, stocks may stumble and the safe-haven dollar has room to rise.

Euro/dollar is suffering from downside momentum on the four-hour chart and is set to fall below the 100 Simple Moving Average after losing the 50 SMA. The Relative Strength Index is above 30, thus outside oversold conditions.

Initial support is at the daily low of 1.1730, followed by 1.17, a double-bottom from late July. Further down, 1.1625 and 1.545 await the currency pair.

EUR/USD faces some resistance at 1.1755, the daily high, followed by 1.1810, a temporary cushion last week. Further above, 1.1850 and 1.1915 are eyed.

2) USD/JPY Closed A Choppy Trade Session Unchanged Near The 106 Pivot

Markets started the week rather subdued. There was only little guidance from the eco calendar. Instead, investors mulled the stronger-than-expected payrolls report on Friday, president Trump taking fiscal matters into his own hands over the weekend and simmering geopolitical tensions and tit-for-tat action by China against the US. Initially, the latter dampened risk sentiment. European stocks eventually managed to close marginally in the green though. Wall Street ended up to 1.3% higher (DJI) even as stimulus talks between the Republicans and Democrats show little signs of progress. Falling hospitalizations in some US areas also added to the cautious risk return. Core bonds traded mixed. USTS performed an intraday U-turn, extending the bounce after hitting the 0.54% support level as yields advance 0.3 bps (2-yr) to 2 bps (30-yr). The German Bund shed up to 1.7 bps (10-yr). Peripheral spreads remained largely unchanged with the exception of Greece (+ 5 bps). The dollar further recovered from the recent blow even as risk sentiment wasn’t too bad. The gentle rise in US yields were probably the main factor behind the move. The trade-weighted greenback closed at 93.58, up from 93.43 last Friday. EUR/USD’s (poor) attempt to regain 1.18 failed and eventually closed at 1.1738 (down from 1.1787). USD/JPY closed a choppy trade session unchanged near the 106 pivot. Sterling strengthened to the euro in a move that’s partially driven by technical considerations. EUR/GBP slipped through 0.90 to close at 0.898.

Asian markets strike an upbeat tone this morning, putting comfort from the US coronavirus data. President Trump said he’s considering cuts in capital gains taxes and middle income taxes. On China’s retaliatory actions, he added that the US has already responded in many ways. Stocks rise up to 2.5% (Hong Kong, Japan). US Treasuries as well as the German Bund trade a tad softer than yesterday’s close. The Aussie (0.718) and kiwi dollar (0.662) lead the risk move higher on FX markets. The dollar loses marginal ground with EUR/USD trading near 1.175 and the trade-weighted (DXY) near 93.52. USD/JPY clears the 106 hurdle (106.14) for now. A constructive risk sentiment pushes gold back lower towards the (still high) 2000 lever.

There are few eco data releases scheduled for today. Germany’s ZEW is worth nothing but we doubt it’ll be of any significance for trading today. Consensus expects the forward looking component to retreat again slightly after a massive surge over the course of April-June. The current series should continue to bottom out. Overall risk mood remains today’s most important driver though. Equity futures point at a green opening. Provided the current sentiment holds, we expect core bonds to shed some ground but see little reason for the moves to be outspoken in the run-up to Friday’s important US retail sales. EUR/USD in theory might profit but the tentative halt in US yield declines might provide a bottom for the dollar, especially after its recent slide. EUR/USD 1.1822 acts as a first resistance. Sterling investors are currently digesting the June labour report, which came in stronger than expected. The impact on the pound remains limited however with EUR/GBP hovering near opening levels of 0.898 and will probably subject to technical and sentiment driven trading motives.

3) The Unemployment Rate In Britain Remains Defiantly

The unemployment rate in Britain remains defiantly at the historic low levels of 3.9%, rather than ticking higher to 4.2% as expected. That’s where the good news ends. Cracks are starting to appear in the UK labour market and they ain’t small.

The UK claimant count, so the number of people who signed up for unemployment benefits jumped by 94.4k, well ahead of the 10k forecast and after falling 28k in June. Just last month 81,000 jobs were lost in the UK, owing to the coronavirus crisis whilst across the three month period to June, the period the UK saw the most severe hit from coronavirus, 220,000 jobs were lost – the most since the financial crisis.

Suddenly we are starting to see some of those who had been in the no man’s land of furlough, start to appear in the statistics. This is a trend which is set to continue over the coming months as the government tapers its support from the job retention scheme.

As the government withdraws its support, these numbers will get worse. The BoE expects unemployment to reach 7.5%. So far this month we have heard big names across principally the hospitality sector and retail sector announce job losses. This will become more common as the 9 million furloughed either find themselves back in their place of work or in the dole queue.

Importantly consumption showed signs of returning to normality in July. Consumption needs to pick up as the government withdraws support, in order for spending to be maintained and jobs kept.

Average earnings were also worse than forecast declining -1.2%, against -1.1% expectations.

Following the release GBP/USD dropped lower, hit by the disappointment of such an elevated claimant count. From trading above $1.31 prior to the release, GBP/USD has skidded through the key $1.31 level and is targeting $1.3050.

Fears are rising that a post lockdown labour market crisis could hamper the so far solid economic recovery.