17-Sep-2020

1) GBP/USD: Recovery Move Falters Near Bearish Flag Resistance, Focus Shifts To BOE
2) EUR/USD: Post-FOMC Slide Sets The Stage For Further Near-Term Downfall
3)  XAU/USD: Gold Sold-Off Into Fed’s Optimism But Downside Limited?
4) Boj And Fed Stand Pat, Focus Turns To BOE Meeting

1) GBP/USD: Recovery Move Falters Near Bearish Flag Resistance, Focus Shifts To BOE

The GBP/USD pair built on its recent strong recovery move from multi-week lows and gained some strong follow-through traction for the third consecutive session on Wednesday. As investors looked past the recent developments surrounding the Brexit saga, the British pound got a strong boost from reports that Britain offered tentative concessions on fisheries in trade talks with the European Union last week. On the economic data front, the headline UK CPI dropped sharply to 0.2% in August from 1% previous. The reading, however, was slightly better than consensus estimates pointing to a 0.1% rise and remained supportive.

The pair shot to fresh weekly tops, albeit struggled to capitalize on the move further beyond the key 1.3000 psychological mark and witnessed a modest pullback of around 35-40 pips. The US dollar got some respite after the Fed gave no indication of additional stimulus to shore up a battered US economy. Adding to this, the Fed also upgraded its economic outlook and projected a much shallower contraction in 2020. The unemployment rate forecasts were also revised lower through the horizon. The Fed’s upbeat assessment of the economic recovery prompted some USD short-covering move, which, in turn, kept a lid on any strong gains for the major.

Meanwhile, a turnaround in the global risk sentiment further drove some heaven flows towards the greenback and exerted some pressure on the major through the Asian session on Thursday. The pair eroded a part of the previous day’s positive move but managed to find decent support near the 1.2900 mark. The pair was last seen hovering just below mid-1.2900s as market participants now look forward to the latest BoE monetary policy decision. The UK central bank is not expected to change its policy setting and hence, the key focus will be on the accompanying statement. That said, the announcement is unlikely to be a major game-changer for the sterling, which remains at the mercy of the incoming Brexit-related headlines.

From a technical perspective, the pair stalled its recovery move near a resistance marked by the top end of a short-term ascending channel. Given the recent sharp fall, the mentioned channel constitutes the formation of a bearish flag pattern on short-term charts. The pair was last seen hovering near the trend-channel support, around the 1.2925-20 region, which if broken decisively will be seen as a fresh trigger for bearish traders.  The pair might then break below the 1.2900 mark and accelerate the downward trajectory further towards the 1.2840-35 horizontal support.

On the flip side, any meaningful positive move might continue to confront a stiff resistance near the 1.3000 mark. A sustained move beyond, leading to some follow-through buying above the 1.3035-40 region will negate the bearish set-up and set the stage for an extension of the recent positive move, towards reclaiming the 1.3100 round-figure mark. The momentum could further get extended towards the next major hurdle near the 1.3175-80 regions.

2) EUR/USD: Post-FOMC Slide Sets The Stage For Further Near-Term Downfall

The US dollar witnessed some aggressive short-covering move after the Fed gave no indication of additional stimulus to shore up a battered US economy. As was widely expected, the FOMC kept federal funds rate unchanged at 0-0.25% and indicated that the benchmark rate will stay close to zero at least through 2023. The Fed also released its new economic projections and now expects economic growth to improve from the coronavirus-induced drop they projected in June. The US central bank projected a much shallower contraction in 2020 and the unemployment rate forecasts were also revised lower through the horizon.

The greenback strengthened across the board in reaction to the Fed’s upbeat assessment of the economic recovery. Adding to this, a turnaround in the equity markets further drove some haven flows towards the USD. The pair retreated nearly 100 pips from daily swing highs and witnessed some follow-through selling during the Asian session on Thursday amid softer global risk sentiment. The downward momentum dragged the pair below an important horizontal support near mid-1.1700s, to the lowest level since August 12.

Market participants now look forward to the final Eurozone CPI figures for some impetus. The US economic docket highlights the release of Philly Fed Manufacturing Index and Initial Weekly Jobless Claims. This, along with housing market data – Building Permits and Housing Starts – might influence the USD price dynamics and produce some meaningful trading opportunities.

From a technical perspective, a break below the 1.1750 support area might have already set the stage for a further near-term depreciating move. Bears, however, took some breather near 50-day SMA, below which the pair seems all set to accelerate the slide towards August monthly swing lows, around the 1.1700-1.1695 region. The latter coincides with the 38.2% Fibonacci level of the 1.1168-1.2011 strong positive move. A convincing break below should pave the way for an extension of the ongoing corrective slide and drag the pair further towards the 1.1600 round-figure mark (50% Fibo. level).

On the flip side, any meaningful recovery attempted might now confront stiff resistance near the 1.1800 mark, which is closely followed by 23.6% Fibo. level, around the 1.1820-25 region. The mentioned barrier is likely to cap the upside, through a sustained strength beyond might trigger some near-term short-covering move. That said, any subsequent move up seems more likely to remain capped near the 1.1900 level.

3)  XAU/USD: Gold Sold-Off Into Fed’s Optimism But Downside Limited?

Wednesday’s all-important US Federal Reserve (Fed) monetary policy decision saved the day for the US dollar and triggered a sharp sell-off in Gold (XAU/USD). The yellow metal refreshed two-week highs at $1973.53 in the first half of the day amid a cautious market mood but failed to sustain at higher levels once again after Fed upgraded its economic assessment. The world’s most powerful central bank pledged to keep rates lower for longer while increasing tolerance for higher inflation. Despite the not-so-dovish Fed-induced gold’s decline, the metal managed to close the day in the green above $1950. Fed’s projection of faster recovery in the economy and jobs market pushed the Treasury yields higher alongside the dollar. Fresh hopes of the US Congress reaching a fiscal stimulus deal also underpinned the greenback.

Looking ahead, gold could see a fresh leg lower, as the European traders hit their desks and react to the Fed optimism, emboldening the dollar bulls. Although the downside could be limited if the sentiment improves on Wall Street and weighs on the dollar’s move higher. The US Initial Jobless Claims will be also closely eyed later on Thursday.

Gold failed to found acceptance above $1970 levels for the second day in a row, as it fell back below the 21-day Simple Moving Average (DMA), now at $1944.57.

The bulls are likely to find strong support at the upward-sloping 50-DMA at $1932. Therefore, a tepid bounce from that level cannot be ruled out. A daily closing above the $1950 level also keeps the buyers hopeful.

The 14-day Relative Strength Index (RSI), currently at 48.84, continues to paint a bearish picture. A daily closing below the 50-DMA support is needed to confirm the bearish reversal. Sellers would then target the critical support around the $1905 region.

4) Boj And Fed Stand Pat, Focus Turns To BOE Meeting

The US Federal Reserve said it would keep the policy accommodative until inflation moderately overshot 2% for some time. Most Fed members see the Federal funds rate at 0% until atleast 2023. Fed members see the inflation returning to close to 2% levels by 2023 and unemployment rate close to 4% by 2023. The Fed would also maintain the current pace of asset purchases of USD 120bn per month until necessary.

Though the policy is as dovish as it can get, the market was already expecting this. As we have been highlighting for a while now, a lot of the dovishness is already priced in. The threshold therefore in terms of what the Fed would have to say or do is extremely high for the US Dollar to weaken from here. In terms of impact, the US Dollar has strengthened post the policy. The Euro is now at 1.1750, the lower end of its recent trading range. US yields are almost unchanged. US equities which were trading with gains of around 1%, gave up gains post policy. Prior to the policy, US August retail sales had come in weaker than expected (0.6% MoM against expectations of 1%)

With no major surprises from the Fed policy and the US Dollar broadly stable globally, the Rupee should continue to trade the 73.00-74.00 range a while longer. While several inflows are queued up, we expect the RBI to continue accumulating reserves and that should limit down side. The Yuan is continuing to strengthen and that should limit USD strength against Asian currencies. USDINR is likely to trade 73.50-73.85 intraday with upside bias.

Bank of England rate decision is due today. While the BoE is expected to keep rates on hold, its expectations regarding pickup in economic activity will be important. Market will look for clues as to how it sees EU-UK negotiations and what would be its reaction function in case of a no deal Brexit scenario. US weekly jobless claim also due today.

Strategy: Exporters have been advised to cover on upticks towards 74.00. Importers are advised to hold. The 3M range for USDINR is 72.50 – 74.50 and the 6M range is 72.50 – 75.40.