21-May-2020

1) Dollar Ends Lower On Improved Risk Sentiment, Euro Rallies on Franco-German Proposal
2) Asia Oil: Onwards and Upwards For Oil Futures in the US Session
3) EUR/USD: Multi-Week Trading Range Resistance Capped Gains Ahead of Euro zone PMIs

1) Dollar Ends Lower On Improved Risk Sentiment, Euro Rallies on Franco-German Proposal

The greenback ended the day lower against majority of its peers on Wednesday as a rally in U.S. stocks boosted risk sentiment. (Dow Jones ended the day higher by 369 points or 1.52%). Euro extended its recent winning streak on news of the recently announced Franco-German recovery fund proposal.

Reuters reported the Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.     The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Versus the Japanese yen, although dollar extend its overnight losses to 107.65 in Australia, price rose to session highs at 107.98 in Asia. However, the pair then erased its losses and tumbled to 107.34 in New York morning on usd’s broad-based weakness together with fall in U.S. Treasury yields before rebounding to 107.56 near the close on short-covering.

The single currency traded with a firm bias in Asia and extended its recent winning streak on the Franco-German recovery fund proposal and ratcheted higher in Europe on broad-based buying in euro. Price then rose to a 2-1/2 week peak at 1.0999 in New York morning before retreating to 1.0972 on profit-taking and then moved narrowly.

The British pound went through a roller-coaster ride. Despite rebounding to 1.2277 in Asian morning, price fell to session lows of 1.2222 in early European morning on soft UK inflation data. The price then erased its losses and rose in tandem with euro to 1.2287 in New York morning but only to retreat back to 1.2226 in New York on renewed sterling’s weakness following comments from the Bank of England’s Governor, Andrew Bailey, and then moved sideways.

Reuters reported the Bank of England is looking carefully at the experience of other central banks with negative interest rates, Governor Andrew Bailey said on Wednesday. Bailey said the BoE was not ruling out taking rates below zero for the first time, but he told lawmakers that the British central bank was “not ruling it in” either.

On the data front, Reuters reported Britain’s inflation rate fell sharply in April to its lowest since August 2016 as retailers resorted to discounts in the face of the coronavirus shutdown, global oil prices slumped and regulated water and power tariffs slid. The consumer price index dropped to an annual rate of 0.8% in April from 1.5% in March, official data showed on Wednesday. Economists polled by Reuters had mostly thought the CPI would fall to 0.9%.

2) Asia Oil: Onwards and Upwards For Oil Futures in the US Session

After a rare lull in price action when the macro scrim was sullied by bearish comments on the US economy from Treasury Secretary Mnuchin and Fed Chairman Powell on Tuesday, it was upwards and onwards for oil futures which notched their highest close in 10 weeks after prices soared on a bullish to consensus EIA inventory draw. The draw favorably confirms the empirical evidence that gasoline demand is returning to standards as traffic congestion rises in major cities across the US with consumer driving habits returning to a state of preCovid-19 normalcy.

The string of weekly inventory beats is quite a turnaround from when we saw record inventory “swells” only a few weeks ago. But today’s EIA draw is an unambiguous reading and provides clear evidence of recovering US demand, a plunging US supply response but most likely a favorable combination of both.

With greater certainty on supply reductions resulting from additional production cut commitments from Saudi Arabia and the UAE, plus accelerating curtailments and shut-ins in the US, traders are more confident than ever that the market will balance in 3Q20 and that conditions will be in a significant deficit in 4Q, or even before.

Near-term risks remain, and there’s some justified worry that sentiment could turn on a dime if there’s bad news on the duration of the coronavirus disruption, or if US-China tensions flare further. But with unequivocal evidence of rebalancing markets at a quicker pace than even imaginable only a few weeks ago, along with the incomprehensibly large global stimulus which is starting to find its way into commodity markets and providing a significant tailwind as colossal oil consumption economies around the world reopen, traders are now confidently looking through the near term noise and focusing on the medium-term outlook. It’s soon to be all systems go for oil markets when the global economy fully opens for business – possibly in the next month or so.

In Asia, oil markets could find further support if the NPC opens up a more accommodative monetary and fiscal policy stance. China’s ‘Two Sessions’ kicks off today with the People’s Consultative Conference, followed by the National People’s Congress on Friday.

3) EUR/USD: Multi-Week Trading Range Resistance Capped Gains Ahead of Euro zone PMIs

The EUR/USD pair prolonged its positive move for the fourth straight session and shot to three-week tops on Wednesday. The shared currency remained well supported by the Franco-German proposal for a €500 billion European recovery fund. Bulls seemed rather unaffected by Wednesday release of softer-than-expected final Eurozone CPI, which missed the flash estimate and came in at 0.3% for April.

Meanwhile, the emergence of some fresh selling around the US dollar provided an additional boost to the major and remained supportive of the momentum. Despite fading hopes for a potential COVID-19 vaccine and concerns over worsening US-China relations, the upbeat market mood was seen as one of the key factors that undermined the greenback’s perceived safe-haven demand.

The pair rallied back closer to monthly tops, albeit failed near the key 1.1000 psychological mark and witnessed a modest pullback following the release of FOMC meeting minutes, which sent a dovish message about the economic recovery. Minutes for the FOMC meeting held on April 29 also warned that the coronavirus pandemic posed both a severe economic threat and a risk to financial stability.

Nevertheless, the pair ended the day with strong gains but struggled to gain any strong follow-through, instead witnessed a modest pullback during the Asian session on Thursday. A further escalation in disputes between the world’s two largest economies weighed on investors’ sentiment and exerted some pressure on the major. It is worth mentioning that the US Senate passed a bill that could block some Chinese companies from selling shares on the American stock exchanges.

The pair was last seen trading just above mid-1.0900s as market participants now look forward to the flash version of Eurozone PMI prints for May, which will play a key role in driving the market sentiment surrounding the common currency. Later during the early North American session, the US economic docket – featuring the releases of Philly Fed Manufacturing Index, Initial Weekly Jobless Claims and Flash Manufacturing PMI – might influence the USD price dynamics and produce some meaningful trading opportunities.

From a technical perspective, the pair stalled its positive momentum near a resistance marked by the top end of a multi-week-old trading range. Hence, it will be prudent to wait for some strong follow-through buying to confirm a near-term bullish breakout and positioning for any further near-term appreciating move. Any fresh move up might continue to confront some resistance near the 1.1000 mark, which is closely followed by the very important 200-day SMA, around the 1.1015-20 region. A convincing breakthrough the mentioned barrier will be seen as a fresh trigger for bullish traders and set the stage for a move towards reclaiming the 1.1100 round-figure mark with some intermediate resistance near the 1.1040-50 region.

On the flip side, any meaningful pullback is likely to find some support near the 1.0900 mark, which if broken might accelerate the fall towards the 1.0845 horizontal support. Some follow-through selling has the potential to drag the pair back towards the 1.0800 mark ahead of the trading range support, near the 1.0775 region. Failure to defend the mentioned support levels might now turn the pair vulnerable to break below the 1.0700 mark and slide further to retest YTD lows, around the 1.0635 region.