18-Mar-2020

1) The Rebound On Stimulus Hopes Loses Momentum. Brent Below $30
2) GBP/USD Nosedived To Fresh YTD
3) EUR/USD Witnessed Some Aggressive Selling On Tuesday

1) The Rebound On Stimulus Hopes Loses Momentum. Brent Below $30

A bigger picture is starting to emerge of how governments are responding to the pandemic and that in itself offers some needed certainty. Authorities are trying to balance economically damaging travel restrictions and social distancing rules with cheap loans for businesses and some relief to households.

Stock markets managed to finish positively on Tuesday amid a flurry of new fiscal stimulus measures. Gold closed substantially higher too so the moves in the stock market are partly just a rebound from oversold levels that can easily reverse.

The FTSE 100 tuned higher on the prospect of new financial measures from Chancellor Rishi Sunak. Other European benchmarks including Spain’s IBEX 35 reacted positively to a massive new 200 billion euro stimulus in Spain.

The rebound seems to be losing momentum as of Wednesday. The magnitude of the pandemic is outweighing stimulus hopes.

As far as short term investors psychology. You know that no government policy can stop the fallout from the coronavirus so you’re not ready to buy but if the blow can be cushioned a little you’re not in quite such a panic to sell.

The EU now agreeing to close its external borders. It smacks of the closing the gate after the horse has bolted. Italy was and continues to be the biggest fear factor inside Europe. The number of coronavirus cases in Italy shot up to 31,506 from 27,980 yesterday, up 12.6%.

Sunak described a massive new UK stimulus as unprecedented, and it is. The UK Treasury will offer £330 billion in loan guarantees and will buy commercial paper to help businesses weather the storm. Affected households will have tax relief and a mortgage holiday. We just have doubts about whether any government can execute complicated measures in time when the support is needed ASAP. That’s why helicopter money is gaining traction.

The White House is proposing a $1 trillion emergency stimulus because US unemployment could hit 20%. New York City coronavirus cases have risen by 300 in a day and we’d expect the numbers are going to shoot up as US expands testing. The Las Vegas strip is shutting for 30 days. Markets like the solution but not the reason for the stimulus.

The dollar had a blockbuster day across forex markets. The prospect of direct cash payments to Americans is dollar-positive because it doesn’t involve outright currency debasement like quantitative easing. QE is printing money to buy government bonds while the cash payments as touted so far would be funded by government debt. If the cash payments were to be funded by central banks printing the money out of thin air, that’s helicopter money and should be a negative force on the currency.

GBPUSD is back to its post-Brexit low near 1.20, EURUSD slid over 200 pips below 1.10 and notably AUSD fell below 0.60 for the first time since 2003.

Brent crude oil is back below $30 per barrel on Wednesday. After consolidating for a week the breakout in oil looks to be to the downside. The sheer size of the demand shock without OPEC intervention means another jolt south in oil prices seems more likely than not.

2) GBP/USD Nosedived To Fresh YTD

Following the previous day’s good two-way price action, the GBP/USD pair witnessed some aggressive selling on Tuesday and nosedived to over six-month lows amid resurgent US dollar demand. As investors looked past the Fed’s aggressive policy easing move, a turnaround in the global risk sentiment allowed the US Treasury bond yields to stage a solid rebound. This eventually helped revive the greenback demand, which was further boosted by growing market fears of further USD shortages. On the other hand, the British pound was being weighed down by the UK government’s different stance on combating the coronavirus pandemic.

Meanwhile, Tuesday’s mixed UK employment details failed to impress bullish traders, rather passed unnoticed amid growing market concerns over the economic fallout from the virus outbreak. The latest UK jobs report showed that the number of unemployed people increased by 17.3K in February, lower than anticipated, and average earnings growth including bonus stood at 3.1$ against 2.9% previous and 3.0% expected. The positive readings, to a larger extent, were negated by an unexpected uptick in the unemployment rate, which rose to 3.9% from 3.8% previous.

The pair plunged nearly 275 pips from daily tops, albeit managed to find some support near the key 1.20 psychological mark after the UK Chancellor Rishi Sunak announced £330 billion stimulus package. The pair finally settled around 50 pips off lows and gained some follow-through traction during the Asian session on Wednesday amid a modest USD pullback. However, the uptick lacked any strong follow-through and runs the risk of fizzling out rather quickly in wake of the UK Prime Minister Boris Johnson’s overnight comments, reiterating that the transition period would end as scheduled on December 31st.

Hence, it will be prudent to wait for some strong follow-through buying before confirming that a near-term bottom is already in place and positioning for any further near-term recovery. In absence of any major market-moving economic releases, either from the UK or the US, developments surrounding the coronavirus saga might continue to play a key role in influencing the broader market risk sentiment and produce some meaningful trading opportunities.

Looking at the technical picture, the recent slump of around 1200 pips from the 1.3200 round-figure mark has been along a short-term descending trend-channel formation on short-term charts. The set-up indicates a well-established bearish trend and hence, any subsequent recovery beyond the 1.2100 mark is likely to confront stiff resistance, rather remain capped near the top end of the mentioned channel, currently near the 1.2175-80 region. That said, a convincing break through might negate prospects for any further downfall and prompt some aggressive near-term short-covering move.

On the flip side, bearish traders are likely to aim for a sustained weakness below the 1.20 mark before positioning for a slide back towards early September 2019 swing lows, around the 1.1960-55 region. The downward trajectory could further get extended towards the 1.1900 round-figure mark en-route the trend-channel support, currently near the 1.1865-60 regions.

3) EUR/USD Witnessed Some Aggressive Selling On Tuesday

The EUR/USD pair failed to capitalize on the previous day’s attempted positive move and came under some intense selling pressure on Tuesday. The shared currency was weighed down by awful German ZEW Survey results, which showed that economic sentiment dropped sharply to -49.5 in March from 8.7 previous, recording the largest drop on records. Meanwhile, economic sentiment in the Euro zone collapsed to -49.5 and the current situation index fell to -48.5. This coupled with a strong pickup in the US dollar demand aggravated the intraday bearish pressure and led to the pair’s sharp intraday fall of nearly 250 pips, to the lowest level in nearly three weeks.

As investors looked past the Fed’s emergency move to slash interest rates to zero, a modest recovery in the global risk sentiment led to a strong recovery in the US Treasury bond yields and eventually underpinned the greenback. This coupled with the ongoing funding squeeze around the buck was further cited as a key factor behind the abnormal USD demand. Meanwhile, the disappointing release of the US monthly retail sales, which was largely offset by an upward revision of the previous month’s readings, did little to provide any meaningful impetus and passed unnoticed.

The pair nosedived below the key 1.10 psychological mark, albeit managed to find some support around the 1.0955 region after the Spanish government finally announced a massive economic stimulus package to cushion the economic shock. The common currency gained some follow-through traction during the Asian session on Wednesday and has now recovered nearly 100 pips from the overnight swing lows. However, the upside seems more likely to remain limited, rather runs the risk of fizzling out rather quickly amid some follow-through uptick in the US bond yields, which might continue to lend some support to the greenback.

From a technical perspective, the overnight break below the 1.1055-65 confluence regions might have already shifted the near-term bias back in favour of bearish traders. The mentioned support breakpoint comprised of 100-day SMA and 61.8% Fibonacci level of its February/March rally, which should now act as a key pivotal point for intraday traders. A sustained strength beyond might prompt some short-covering move and lift the pair back above the 1.1100 round-figure mark, though is likely to face stiff resistance and remain capped near the 1.1135 region (50% Fibo. level).

On the flip side, weakness back below the 1.10 mark might be seen as a fresh trigger for bearish traders and set the stage for a move back towards the overnight swing low, around the 1.0955 region. The downward momentum could further get extended towards testing the 1.0900 mark, below which the pair is likely to accelerate the fall further towards challenging the next major support near the 1.0835 horizontal zones.