13-May-2020

1) UK GDP Plunges Lower As Markets Await Powell Speech
2) Dollar Losing Some Momentum?
3) EUR/USD Clings to 1.0850 Amid Second-Wave Fears, Ahead Of Powell

1) UK GDP Plunges Lower As Markets Await Powell Speech

Markets are set to post gains as we approach the open in Europe and that’s despite more worrying news and fears of a second wave of infections from the Coronavirus. Many are now worried that after hoping for lockdown easing for so long, that opening up too fast will cause a second spike in infections leading to stricter lockdown for longer. Officials in South Korea are also reviewing lockdown measures after infections rose.

Yesterday saw the amount of cases reported in Germany triple after lockdown measures were eased. There is now the possibility that stricter measures will be reintroduced after the R-rate jumped back above 1. This is a fear for many other countries, especially the UK after Boris Johnson announced and easing of measures at the start of the week.

The reason the UK is looking to act so quickly to get the economy back up and running was shows on Wednesday morning after GDP data showed that the economy contracted by -5.8% in March and by -2% in Q1, while manufacturing production fell by 9.7%. Both of these numbers were actually slightly better than had been expected with forecasts for monthly GDP at -8%. However, there is still no hiding from the fact the economy remains on course for the worst recession since the 1930’s.

The rest of Wednesday’s session is expected to be dominated by a speech set to be given by Fed Chairman Jerome Powell later this afternoon. Many are focusing on whether the Fed chairman will talk about the prospect of negative interest rates in the US in order to give yet more help to the economy. The Fed has already slashed rates and pledged trillions of dollars in aid to help combat the effect of the pandemic.

The expectation that the speech will bring about some key policy decisions not seen before in the US has led to optimism from investors. However, we think Powell will resist the calls for negative rates despite the very real prospect of deflation, and ongoing pressure from US president Donald Trump. Worryingly in the past the Fed has caved to pressure from Trump on monetary policy despite supposedly being and independent body.

Oil prices remained solid as we continued to push towards the end of the June trading contract. Last month’s move into negative prices has many worried we could see a similar picture once we get to expiry of the June contracts next week. Demand is yet to pick up scientifically enough, however, moves by OPEC to extend output cuts away from the agreement could have an effect.

2) Dollar Losing Some Momentum?

The dollar mostly traded with a downside bias yesterday. Technical factors probably were in play. The TW dollar (DXY) failed to overcome first resistance near 100.40, triggering a correction. US inflation printed much lower than expected. It didn’t cause the USD decline, but the move accelerated afterwards. US president Trump supporting the idea of negative interest rates maybe was a slight USD negative too, even as most Fed members stay very guarded on this topic. Later in the US, risk sentiment deteriorated, but the dollar rebound remained unconvincing. EUR/USD closed at (1.0848 from 1.0807). USD/JPY closed at 107.14.

This morning, Asian markets mostly opened in negative territory after a poor WS close, but are regaining ground. The RBNZ at its policy meeting doubled the amount of QE (NZ$ 60 mld). The policy rate was left unchanged at 0.25%, but Bank openly signaled that negative interest rates remain an option in the future. The kiwi dollar dropped from NZD/USD 0.6080 area to currently trade around 0.6020. USD/JPY is holding stable in the 107.20 area. EUR/USD hovers in the mid 1.08 area.

Today, eco data will be of second tier importance for trading. Markets keep a close eye at a speech of Fed Chair Powell. What is his view to the economy and on the policy response? And are negative rates a real option for Fed policy? We expect Powell to hold the line that other options are preferred. If so, this should be supportive for ST US yields and maybe slightly USD supportive. That said, the USD performance was a bit disappointing yesterday, given overall market conditions. We also have the impression that negative headlines on Europe are moving a bit to the background, at least temporarily. Last week, EUR/USD dropped below 1.08 after the German court ruling, but the 1.0727 correction low was left intact. Institutional issues remain a factor of euro uncertainty, but maybe there is some room for EUR/USD to rebound a bit further in the 1.0727/1.1018 trading range

Sterling was an outright underperformer yesterday. Uncertainty on the easing of the lockdown, BoE Broadbent keeping the door open for negative rates and lingering Brexit uncertainty all weighed on sterling. EUR/GBP closed well north of 0.88. 0.8863 is first important resistance. Sentiment on sterling is turning more negative. Some further EUR/GBP gains are possible. Today, Q1 UK GDP and March production data will be published.

3) EUR/USD Clings to 1.0850 Amid Second-Wave Fears, Ahead Of Powell

EUR/USD is trading around 1.0850, in range. Fears of a second wave of coronavirus in Europe and the US is holding markets back. Fed Chair Powell’s speech is awaited.

From a technical perspective, nothing seems to have changed much for the pair. Bulls are more likely to wait for a sustained strength beyond the 1.0900 mark before positioning for any further near-term appreciating move. Above the mentioned level, the pair seems all set to accelerate the positive move towards the 1.0975 supply zone en-route the key 1.10 psychological mark and monthly tops, around the 1.1020 region. The latter nears the very important 200-day SMA and should now act as a key pivotal point for short-term traders.

On the flip side, the 1.0800 round-figure mark now seems to protect the immediate downside and is closely followed by the 1.0775 horizontal support. Failure to defend the mentioned support levels might prompt some technical selling and drag the pair further towards the 1.0700 mark. The momentum could further get extended back towards challenging YTD lows support near the 1.0635 region.

The US dollar witnessed a sharp intraday pullback from two-week tops and assisted the EUR/USD pair to regain some positive traction on Tuesday. The greenback remained depressed amid the latest optimism over the gradual re-opening of economies in some parts of the world and was further pressured by a fresh leg down in the US Treasury bond yields. The intraday USD bearish pressure remained unabated following the release of the US consumer inflation figures, which showed that headline CPI recorded the biggest decline since December 2008 and plunged 0.8% MoM in April. Adding to this, Core CPI dropped a record 0.4% MoM – the largest monthly decline since 1957.

Meanwhile, bets that the Fed might be forced to push interest rates below zero increased further after the US President Donald Trump asked the US central bank to do more policy easing. Trump said the Federal Reserve should follow its counterparts and cut rates into negative territory to give the US economy a much-needed boost amid the coronavirus crisis. Meanwhile, several FOMC members – including St. Louis Fed President James Bullard and Chicago Fed President Charles Evans – commented against the idea of negative interest rates. Hence, the key focus will be on the Fed Chair Jerome Powell’s scheduled speech during the early North American session on Wednesday.

Nevertheless, broad-based USD weakness led to a strong 100 pips intraday rally and lifted the pair to one-week tops. The momentum, however, ran out of the steam ahead of the 1.0900 round-figure mark amid fears about the second wave of coronavirus infections. The pair finally settled around 40 pips off daily swing high and remained confined in a narrow trading band around mid-1.0800s through the Asian session on Wednesday. Moving ahead, market participants now look forward to the release of the Eurozone Industrial Production data for March, which coupled with a scheduled speech by the ECB’s Chief Economist Philip Lane could influence the shared currency.