25-May-2020

1) GBP/USD: Not So Festive Bank Holiday for the Pound
2) EUR/USD: Remains Well Within a Multi-Week-Old Trading Range
3) Dollar Gains Broadly On Rising US-China Tensions

1) GBP/USD: Not So Festive Bank Holiday for the Pound

Second, coming for sterling? Dominic Cummings, Prime Minister Boris Johnson’s powerful adviser, has been under pressure to quit after a revelation that he violated the lockdown while showing symptoms of COVID-19. That scandal is dogging the government, yet there are greater issues for pound traders to ponder on.

While Brits are enjoying their spring bank holiday – albeit under lockdown restrictions – sterling may continue suffering.

Negative interest rates? Speculation remains rife that the Bank of England will set sub-zero borrowing costs. The latest BOE member was David Ramsden, who opened the door to such a move. He followed the footsteps of Governor Andrew Bailey and others. While negative interest rates have had little benefit for Japan and the eurozone, they may have an adverse effect on the exchange rate.

Lifting lockdown is lengthy: PM Johnson’s main task is managing the coronavirus crisis. He previously announced that further easing of the shuttering will be considered in June, which is a week from now. While COVID-19 statistics continue improving, they remain stubbornly high and may require a gradual process.

Brexit: After a week of finger-pointing around the lack of progress in talks, negotiators will try to advance toward an accord on future EU-UK relations. Brussels wants Britain to adhere to its regulations in return for easy access to the bloc’s single market – a demand London refuses. That is the main sticking point, and there is no evidence that it has changed.

Tense Sino-American relations: Weekend protests in Hong Kong – against China’s suggested security law which tightens Beijing’s grip on the territory– kept tensions high. The US and China also continue clashing about the origins of coronavirus, activities of Chinese firms in America, Taiwan, and more. The safe-haven dollar is in demand.

Washington’s intentions of conducting a nuclear test have also caused concern, with officials in China warning of a “new cold war.” The silver lining, for now, is that both countries have vowed to hold up the trade deal signed in January.

All in all, there are no reasons for sterling to spring back up – nothing has changed in this Spring Bank Holiday.

Pound/dollar is suffering from downside momentum on the four-hour chart and trades below the 50, 100, and 200 Simple Moving Averages – all bearish signs. Moreover, it is capped by a downtrend channel that hits the price at around 1.2220.

Support awaits at 1.2165, a former double bottom, and the daily low. It is followed by 1.2080, May’s trough, and by the psychologically significant 1.20 level.

Some resistance is at 1.2190, the daily high, with the downtrend providing another cap. Next, 1.2250 was another double-bottom and 1.23 was the peak last week.

2) EUR/USD: Remains Well Within a Multi-Week-Old Trading Range

The EUR/USD pair witnessed some follow-through selling on Friday and extended the previous day’s retracement slide from three-week tops, levels just above the key 1.10 psychological mark. China’s proposal to impose new national security law on Hong Kong, followed by US President Donald Trump’s warning that they would react very strongly against the attempt fueled concerns about worsening US-China relations. Escalating tensions between the world’s two largest economies benefitted the US dollar’s perceived safe-haven status and turned out to be one of the key factors that kept exerting some pressure on the major.

The shared currency was further pressured following the release of the ECB Minutes, which revealed the central bank’s readiness to expand its easing measures at the upcoming policy meeting in June. Accounts of April 29-30 ECB monetary policy meeting indicated that policymakers judged that the scale of the stimulus was falling short of what was needed. The Governing Council is fully prepared to increase the size of the Pandemic Emergency Purchase Programme (PEPP) and use other tools to support the economy. The combination of negative factors pushed the pair back below the 1.0900 mark on the last trading day of the week.

The pair remained depressed below the mentioned level through the Asian session on Monday as market participants now look forward to the final version of the German Q1 GDP print for a fresh impetus. This coupled with the release of German IFO Survey results for May will influence sentiment surrounding the common currency and produce some meaningful trading opportunities on the first day of a new trading week. Meanwhile, relatively thin liquidity conditions on the back of Memorial Day holiday in the US might hold investors from placing any aggressive bets and lead to a subdued/range-bound trading action.

From a technical perspective, the pair last week once again faced rejection near the very important 200-day SMA. A subsequent slide below the 1.0900 mark points to the emergence of some fresh selling. Hence, some follow-through weakness, towards the 1.0845 horizontal support, now looks a distinct possibility. Some follow-through selling has the potential to drag the pair back towards the 1.0800 mark. This is closely followed by the lower end of a multi-week-old trading range support near the 1.0775 region. Failure to defend the mentioned support levels might be seen as a fresh trigger for bearish traders and turn the pair vulnerable to break below the 1.0700 mark. The momentum could further get extended and the pair seems more likely to head back towards retesting YTD lows, around the 1.0635 region.

On the flip side, any meaningful positive move back above the 1.0900 mark now seems to confront some fresh supply near the 1.0945-50 region. Bulls might then aim towards challenging the trading range resistance, around 1.0975 region, en-route the 1.1000 mark. A convincing break through the 200-day SMA, currently near the 1.1010-15 region, will negate any near-term bearish outlook and set the stage for a further near-term appreciating move. The pair might then aim towards reclaiming the 1.1100 round-figure mark with some intermediate resistance near the 1.1040-50 region.

3) Dollar Gains Broadly On Rising US-China Tensions

The greenback ended the day higher against the majority of its peers on Friday ahead of long holiday weekend except for the Japanese yen as renewed tensions between U.S. and China triggered risk aversion. U.S. markets will be closed for Memorial Day holiday Monday.

Reuters reported China is set to impose new national security legislation on Hong Kong after last year’s pro-democracy unrest, a Chinese official said on Thursday, drawing a warning from President Donald Trump that Washington would react “very strongly” against the attempt to gain more control over the former British colony.    Trump, who has ratcheted up his anti-China rhetoric as he seeks re-election in November, told reporters “nobody knows yet” the details of China’s plan. “If it happens we’ll address that issue very strongly,” he said.

Versus the Japanese yen, although dollar gained to session highs at 107.76 in Asia, price swiftly erased its gains and tumbled to an intra-day low at 107.33 in early European morning on risk-averse buying of jpy on renewed U.S.-China tensions. The pair then rebounded to 107.65 in New York morning before retreating to 107.47 and last traded at 107.61 neat the close.

Reuters reported the Bank of Japan decided on Friday to launch a new lending facility that aims to channel more funds to small and midsize businesses suffering from the economic blow of the coronavirus pandemic.    In an emergency policy meeting, the central bank also extended the deadline for a series of measures it has deployed to combat the virus fallout, including accelerated corporate debt buying, by six months to March 2021.

As widely expected, the BOJ kept monetary settings unchanged including its short-term interest rate target of -0.1% and a pledge to guide the 10-year government bond yield around 0%.

The single currency met renewed selling at 1.0959 in Australia and continued to ratchet lower in Asia on long-liquidation in euro together with riks off sentiment. Euro fell to session lows of 1.0886 in New York morning due partly to cross-selling vs sterling before moving narrowly in New York afternoon.

In other news, Reuters reported the European Central Bank is ready to expand its Pandemic Emergency Purchase Scheme as early as June, if economic data warrant such a move, policymakers concluded in their April 30 meeting, the accounts of discussion showed on Friday. “It (the Governing Council) was fully prepared to increase the size of the PEPP and adjust its composition, and potentially its other instruments, if, in the light of information that became available before its June meeting, it judged that the scale of the stimulus was falling short of what was needed,” the ECB said.

Policymakers agreed at the April meeting to provide loans at even more favourable terms but held back on big moves such as extending or expanding asset purchases, disappointing some market players.

The British pound met renewed selling at 1.2233 in Asia and retreated to 1.2200 ahead of European open. Intra-day decline accelerated in early European trading after the release of weak UK retail sales data and hit session lows at 1.2161. However, price pared intra-day losses and staged a brief rebound to 1.2208 in New York morning due partly to cross-buying of sterling especially vs euro but later inched lower to 1.2164 at the close.

Reuters reported British retail sales fell by the most on record in April as much of the sector was shuttered by the government’s coronavirus lockdown, official figures showed on Friday. Sales volumes fell 18.1% in April from March, a bigger fall than a median forecast for a drop of 16% in a Reuters poll of economists.

Japan leading indicator, coincident index, UK market holiday, Germany GDP. Ifo business climate, Ifo current conditions, Ifo expectation and U.S. market holiday on Monday.

New Zealand imports, trade balance, exports, annual trade balance, Japan total industry activity, Germany GfK consumer sentiment, Swiss trade balance, exports, imports, non-farm payrolls, France business climate, UK CBI distributive trades and U.S. building permits, national activity index, monthly home price, CS home price, consumer confidence, new home sales, sales Fed manufacturing business on Tuesday.

Australia construction work done, France consumer confidence, Swiss investor sentiment and U.S. MBA mortgage application, Redbook, Richmond Fed manufacturing on Wednesday.

New Zealand NBNZ business outlook, NBNZ own activity, Italy production price, MFG business confidence, consumer confidence, trade balance, EU business climate, economic sentiment, industrial sentiment, services sentiment, consumer confidence, Germany CPI, HICP, U.S. Durable goods, Durables ex-transport, Durables ex-defense, GDP, core PCE prices, initial jobless claims, continued jobless claims, pending home index, KC Fed manufacturing, and Canada current account, average weekly earnings on Thursday.

UK nationwide house price, GfK consumer confidence, Japan Tokyo core CPI, unemployment rate, industrial output, retail sales, construction orders, housing starts, consumer confidence, Germany import prices, retail sales, France GDP, CPI (EU norm), CPI, producer prices, Swiss KOF indicator, Italy GDP, consumer price, CPI, EU HICP, core HICP, U.S. personal income, core PCE price, goods trade balance, Chicago PMI, University Michigan sentiment and Canada GDP, producer prices, budget balance on Friday.