16-Jul-2020

1) USD Decline Shows Tentative Signs Of Slowing
2) What Might The ECB Do For The Euro Tonight?
3) Where Now For The EUR/CHF?
4) GBP/USD: Are Bears Ready To Take Over? Focus On Negative Figures Opens Door To The Downside

1) USD Decline Shows Tentative Signs Of Slowing

An outright risk-on initially triggered further USD selling yesterday. EUR/USD tested the mid 1.14 area. Interestingly, USD/JPY also followed the broader USD downtrend. US data including Empire manufacturing survey and production data were better than expected, but didn’t help the dollar. The TW dollar (DXY) came within reach of the key 95.72 support, but a real test didn’t occur. Later, equities stayed in positive territory, but uncertainty on the next phase in the pandemic prevented an acceleration of the risk-on. EUR/USD closed at 1.1412, off the day top. USD/JPY closed near 107 after filling bids in the 106.70 area earlier.

This morning, Asian equities are falling prey to profit taking. China Q2 GDP printed stronger than expected (3.2% Y/Y), but slightly weaker than expected June China retail sales dampened optimism. The TW dollar returned to the 96 area late yesterday and extends its comeback this morning. EUR/USD struggles not to fall back below 1.14. Australia labour market data were mixed. However, together with a broader USD rebound, they weren’t good enough to keep AUD/USD north of the 0.70.

Today, the ECB policy decision is the key for EMU markets. In US the June retail sales, the Philly Fed outlook and jobless claims all are worth monitoring. US data are expected to show the positive impact of the reopening of the economy. Question is whether this is sustainable given the rise in US infections. Even solid US data probably will have little (positive) impact on the USD. We expect ECB’s Lagarde to err to the side of caution and keep to door open for more easing. A less dovish stance probably will be negative rather than a positive for the euro. Of late, the dollar developed a gradual downtrend. At the same time, the euro was well bid too. There is no obvious trigger to row against this trend, but a pause might be on the cards. The pair recently was captured in buy-on-dips pattern. 1.1422 was extensively tested, but the move is running into resistance. A break toward the 1.1495 top probably needs help from a positive EU summit. EUR/GBP yesterday entered some ST consolidation modus after rather steep sterling losses on Tuesday. The pair settled in the mid 0.90 area. This morning, UK labour data show less job losses than expected/feared, however this real impact still has to become apparent when government support schemes will be scaled back. We see no obvious trigger for sustained sterling gains, especially not if sentiment turns more cautious. 0.90 should be solid support ST.

2) What Might The ECB Do For The Euro Tonight?

Expecting the unexpected has become the way of life for many a trader in the pandemic, not that long ago, the year end forecast for the euro was much weaker than its current pricing. Events like this truly show how difficult forecasting is in the current climate that the global financial markets are facing. The Euro was anticipated to close the year out somewhere in the vicinity of 1.12, its already at 1.14, well ahead of the schedule. This is in part thanks to the spending of the European Central Bank and a weakening greenback.

Tonight, we are expecting the European Central Bank to issue an update on their monetary policy stance, this could mean some changes are to come. In 2020 The ECB has been deliberate and timely in their actions, throwing fistfuls of cash into the economy to try and keep it afloat. Like many of the world’s central banks the threat of economic disaster and a distaste for the Global financial crisis has spurred on ill feelings and a need to act quickly during the pandemic.

Regardless of the efforts they have so far pursued there is little to no room for complacency; the Euro Zone faces a great deal of risks that are simply out of their immediate control.

Tonight, the obvious focus for the ECB will be on their bond purchases program, as a reminder June saw the ECB dump 1.35 trillion Euros into its pandemic emergency purchases program as reserves. Christine Lagarde the current president of the ECB has a balancing act to maintain, she effectively needs to keep the public positive about how much ammo they (the ECB) have while not loading the muskets. It’s a delicate process, pump too much money into the economy and risk inflationary problems and sentiment collapse, pump to0 little and you run into the same again on a different scale.

We are not expecting drastic changes at tonight’s ECB announcements, we feel that they will try to keep their options open. A slightly improved 2nd quarter and equities continuing to remain afloat gives them some positives to monitor. We may see more clarification on the PEPP programs as the language has been pretty loose in the past which may lead to the possible tapering of existing bond purchases in the PEPP.

3) Where Now For The EUR/CHF?

EURCHF has gained recently on two factors. Firstly, the improving risks tone. Secondly, on the hopes of the €750billion recovery fund being agreed over the weekend. This has led to the EURCHF pair rising above 1.0700 handle and now heading testing the 200DEMA.

Risk for the euro is coming up later today and over the weekend. So, if the economic recovery fund is rejected over the weekend then the 200DEMA offers an excellent place to limit risk for sellers. If there is any early news of the frugal four/five rejecting the deal that offers sellers the chance to sell EURCHF at market. It is around a 50/50 chance on whether the fund is agreed over the weekend. Less surprises are expected from the ECB rate meeting today, but it always pays to be prepared for any surprises. A surprise interest rate cut would also offer a great place to sell EURCHF at market.

Earlier this week Thomas Jordan of the SNB repeated his willingness to intervene in the EURCHF pair by weakening the Franc. Remember that the Swiss export economy is hindered by a strong CHF, so the SNB have been intervening in the currency markets in order to weaken the CHF through the purchase of Euros and Dollars. This is one of the reasons that the US has labelled the Swiss as ‘currency manipulators’. The US treasury cited the nations’s high current account surplus and bilateral trade balance as evidence of its manipulation.

Despite attempts to weaken the CHF over the years including huge levels of intervention, trying to peg the 1.200 handle, and having the world’s lowest interest rates at -0.75% the success has been limited. As you can see from the chart below the SNB face an uphill struggle in trying to weaken the CHF. So, the 200DEmA is a key hurdle for the EURCHF to overcome and could provide a great place for sellers to have their stops defined and limited.

4) GBP/USD: Are Bears Ready To Take Over? Focus On Negative Figures Opens Door To The Downside

The rosy glasses are gone – and markets are experiencing a reality check or a sobering up. Investors seem to focus on the negatives in every development rather than clinging onto the positives – and that may push the pound even lower.

The UK unemployment rate remained at 3.9% in May – an excellent level in absolute terms and beating expectations once again. The Claimant Count Change also surprise with a drop of around 28,000, instead of rising.

However, average earnings are now down 0.3% year over year, ending an era of pay rises. GBP/USD has been extending its losses following the publication, focusing on the negatives and the potential for disinflation.

Andrew Bailey, Governor of the Bank of England, told MPs that interest rates will remain depressed for at least two more years. The BOE’s borrowing cost stands at 0.10% and setting a negative rate is still “under review.” Further speculation about going negative could send sterling lower.

Earlier in the day, China reported that Gross Domestic Product rebounded by 11.5% in the second quarter and 3.2% yearly. Both figures exceeded estimates. Yet again, stocks dropped as the world’s second-largest economy also saw a drop of 1.8% in June’s retail sales – showing that consumers remain hesitant.

Will US retail sales also disappoint? Figures for June are forecast to reflect an ongoing recovery as the US continued its reopening early on before some states suffered from a resurgence of the virus. Given the recent reactions, investors may find one piece of data or another to worry about.

The reaction to hopes about a COVID-19 vaccine has also changed. Less than two days after Moderna’s progress in developing communication sent global shares soaring, a similar report by AstraZeneca and the University of Oxford failed to inspire investors. An upcoming publication in The Lancet is set to show that the vaccine candidate offers double protection – both antibodies and T-cells.

While the UK coronavirus curve continues falling, infections and deaths in the US are on the rise. Record cases have been reported in California and Texas, and other states are also struggling to keep up. America’s cases have surpassed 3.5 million and mortalities top 137,000.

Overall, reasons to worry have always been out there for investors to see, and they are finally having a reality check. Will this last? That remains an open question.

Momentum on the four-hour chart has turned negative and GBP/USD dropped below the 50 Simple Moving Average. However, it continues trading above the100 and 200 SMAs.

Support awaits at 1.2535, which is where the 200 SMA hits the price and just below the daily low. The next line to watch is 1.2510, a swing low from last week, followed by the weekly trough of 1.2480.

Some resistance is at 1.2565, which was a low point last week, followed by 1.595, a line that worked in both ways in recent days. The triple top of 1.2670 is significant resistance.