18-Jun-2020

1) GBP/USD: BOE Bazooka Needed To Propel the Pound Higher After New Brexit Concerns
2) Dollar Maintains Recent Gains, But No Clear Trend
3) Dow Jones Futures Drop: BOE Meeting and US Jobless Claims in Focus

1) GBP/USD: BOE Bazooka Needed To Propel the Pound Higher After New Brexit Concerns

Another bailout from Andrew Bailey? The Governor of the Bank of England holds the keys to the next moves in sterling – limited ranges are set to make way for high volatility. To what direction?

The BOE is set to expand its bond-buying scheme by around £100 billion or as much as £150 billion according to some estimates. Pound-printing used to mean devaluing the currency in the pre-pandemic era – but that is no longer the case.

Bailey’s previous expansion of the program to its current £645 billion enabled the government to support workers and provide another stimulus in times of trouble and thus supporting the economy. In Thursday’s decision, a higher sum would send sterling higher while a sub £100 billion would weigh on the pound.

The meeting minutes may also reveal how the bank sees the economy as it emerges from lockdown and more importantly for the market reaction, the bank’s opinion on negative interest rates. Bailey said that sub-zero borrowing costs are “under active consideration” but later hinted such a move is not imminent.

The BOE is likely to leave rates unchanged at 0.10%, but laying the ground for going further down would hurt sterling. That may come via a vote of one or more of the Monetary Policy Committee’s members in such a direction. The probability is low but the impact could be significant.

Sterling has been struggling with Brexit uncertainty, and recent developments have been somewhat worrying. While European Commission President Ursula von der Leyen may be ready to offer concessions on fisheries, Germany has reportedly lowered expectations for any progress during the summer.

French President Emmanuel Macron will visit Prime Minister Boris Johnson in London – a rare face-to-face encounter in coronavirus times. The two leaders are always friendly to each other but significant differences remain, with France often seen as the tougher player.

The UK is preparing a “shock and awe” campaign to prepare for Brexit, a headline that has raised eyebrows. It also triggered concerns for a no-trade-deal outcome to the current transition period which expires at year-end.

The US dollar has somewhat advanced amid rising coronavirus hospitalizations and cases in several US southern states such as Texas and Florida. The outbreak in Beijing – which resulted in substantial limits to transport – also worries investors.

President Donald Trump has responded angrily to revelations by former National Security Adviser John Bolton in his upcoming book. Bolton says that Trump sought the help of his Chinese counterpart Xi Jinping in his reelection campaign. The US elections are held only in November but are gaining more traction with Trump’s rival Joe Biden benefiting from a growing lead in the polls.

Jerome Powell, Chairman of the Federal Reserve, called on Congress to do more at a critical juncture for the recovery, evidenced in robust retail sales. Weekly unemployment claims are eyed on Thursday.

Momentum on the four-hour chart has turned positive and the currency pair has recaptured the 100 Simple Moving Average, another positive development. On the other hand, it remains capped by the 50 SMA.

Some resistance awaits at 1.2565, the daily high, followed by 1.2615, a swing low from early June. It is followed by 1.2680, the weekly high, and then by 1.2730.

Support awaits at 1.25, a psychologically significant level, followed by 1.2450, the weekly low, and then by 1.2410, where the 200 SMA hits the price.

2) Dollar Maintains Recent Gains, But No Clear Trend

USD trading was mostly order driven yesterday. Investors still pondered the balance between ample monetary and fiscal stimulus and the risk of a second wave of corona infections. The USD slightly outperformed even as sentiment remained constructive, building on Tuesday’s rebound after strong US retail sales. The TW dollar regained the 97 big figure, but the upside momentum eased later. EUR/USD traded heavy for most of the day but closed at 1.1244, off the intraday low. USD/JPY initially held a tight sideways range in the lower half of the 107 big figure, but slipped to the 107 area as US equity momentum faded going into the close.

This morning, sentiment on Asian markets remains cautious as investors monitor how China handles the new virus outbreak in Beijing. The PBOC indicated that it expects credit flow this year at least rising 30 trillion yuan, supporting the recovery. The yuan strengthened this morning (USD/CNH currently near 7.065). Job losses in Australia in May (decline in employment of 228 000) were much bigger than expected. AUD/USD dropped about half a big figure upon the release, but most of the decline was soon reversed with AUD/USD again trading in the 0.6875 area, underscoring recent resilience of the Australian currency.

There are again few data in Europe today. The Norges Bank and the Swiss National Bank hold policy meetings. Investors will also look out for political quotes on the EU rescue fund at the start of the 2-day summit. An agreement is not expected yet, but the tone of the comments might have some impact on the euro. In the US, weekly jobless claims and the Philly Fed business outlook will be published. On Tuesday, the dollar gained on better than expected US retail sales. However, we expect any USD reaction to the data today to be more guarded. The USD probably will again trade more in line with global risk sentiment. Last week, the three week-long EUR/USD rally fell prey to profit taking. The EUR/USD momentum eased, but first important support in the 1.1160 area stays out of reach. We expect that area to hold and gradually look for a bottoming out process after the recent EUR/USD ‘correction’.

EUR/GBP drifted further below the 0.90 handle yesterday, at least partially driven by overall euro softness. Today, the Bank of England is expected to ease policy further by raising the APP bond purchases by at least £100 bn. The tone of the BoE assessment probably will remain soft. If so, it EUR/GBP might return back to the 0.90 area.

3) Dow Jones Futures Drop: BOE Meeting and US Jobless Claims in Focus

The Dow Jones futures are trading lower by 132 points. The bulls are losing control of the price because the Dow Jones Industrial average has failed to cross above the 200-day smooth moving average (SMA) on a daily time frame. The longer-term time frame, the weekly chart, also shows that the Dow price has failed to win the war against the 50 and 100-week SMAs. If the Dow Jones price fails to cross above the two important moving averages and the Dow remains below them, the door is likely to be wide open for another test of Covid-19’s stock market crash.

The SP500 futures also show signs of weakness and trading lower by 21 points. The week that started with a lot of optimism and hope has lost its mojo. The S&P 500 stock index is still trading above the 200-day SMA on a daily time frame and it is showing a lot better bull strength than the Dow Jones Index.

The Federal Reserve’s chairman, Jerome Powell confirmed once again yesterday in his testimony that certain jobs such as hospitality may not come back quickly. Hence workers in those sectors may need some more help. This echoes the same message that Democrats have been using in order to get more fiscal help. He urged the policymakers to extend the extra $600 in weekly unemployment benefit because, in the absence of this, it could create more damage. The Fed chairman was optimistic about the current recovery and he believes that things are likely to get better than many are anticipating.

The SP500 index declined by 11.25 points or -0.36% and the Dow Jones stocks dropped 170 points or -0.66%. Both, the S&p 500 and the Dow stocks swung between losses and gains throughout the session but it was the energy sector that took most of the beating. Real estate and financial sectors also lead the losses. Stock volume was also 20% below the 30-day average and we continue to see higher volatility. It is highly likely that this surge in volatility may stay here for a little while.