25-Sep-2020

1) Positive Headlines Around A US Stimulus Deal And Vaccine News May Support Risk
2) EUR/USD: A Modest USD Pullback Helped Ease Bearish Pressure, For The Time Being
3) GBP/USD: Bears Await A Sustained Break Below 200-DMA, 38.2% Fibo. Level

1) Positive Headlines Around A US Stimulus Deal And Vaccine News May Support Risk

A mixed start for European stock markets this morning with equities failing to struggling out of bed after yesterday’s session left indices in the red. The FTSE is really struggling to peel away from the 5,800 level, while the DAX either side of the flatline in early trade as investors try to make up their minds.

US stocks finished higher amid a choppy session on Wall Street. Ten out of 11 S&P 500 sectors rose as the broad market closed up 0.3% at 3,246 having tested the lows at 3.209, its weakest intra-day level since the end of July. When the selling at the open didn’t force further selling, there was an opportunity for dip buyers to come in. Nevertheless, the index is down 2.2% for the week still. The Dow rose 0.2% but is –3% for the week. The Nasdaq also rose but is down –1% on the week and is on course for its fourth straight weekly decline, which would be the first such run of losses since August 2019. European markets are on course for 3-4% losses on the week.

Some positive headlines around a US stimulus deal and vaccine news may be supportive of risk today but sentiment is fragile, and it’s been a turbulent week – I think we need to see how it shakes out at the close for a better read on where the next move goes. Whilst the market finished a tad higher yesterday, the S&P 500 keeps making new lows and sentiment seems to hinge around several downside risks. Right now, the up days are not as strong as the down days, which tells me momentum is with the bears for now. Any bounce we get needs to be seen in the context of a very sharp pullback on Monday and on Wednesday. Until we clear last week’s levels – 3400 on SPX, around 3300 on Stoxx 50 and 6,000 on the FTSE, the bias looks to the downside for me.

For the UK, there is looming unemployment crisis, despite the government’s new jobs scheme. Whilst extending support for another 6 months, the chancellor’s plan will only help those in viable jobs – the crunch comes in November. Just how many are viable longer term? How many of the roughly 3m on furlough won’t have a job at Christmas? Needless to say with all this support, UK public borrowing is soaring. This raises concerns about tax rises down the line to ‘pay for it’. But as previously discussed, deficits shouldn’t matter: rather than taxing the recovery and stifling it, the government ought to consider outright debt monetization, given the extraordinary circumstances we are in.

House Democrats are working on a $2.2 trillion coronavirus stimulus package – we’ve been before, so I wouldn’t assume it will pass. Indeed, House Republican leader Kevin McCarthy immediately dismissed the package, but we cannot rule it out entirely. Is this too much of a temptation for bulls? Meanwhile, the nonsense worries about Trump refusing to leave the White House have thankfully been largely put to rest after Senate majority leader Mitch McConnell vowed there will be an orderly transition just as there has been after every election since 1792. However, I still believe the election will be contested and we are unlikely to know the final result on November 4th.

On the vaccine front, there more and more clinical trials happening. Sanofi says it is ready to produce 1bn doses of its vaccine with partner GSK from early next year. Dr Fauci sounded optimistic this week, telling Congress there is “growing optimism” there will be one or more safe and effective vaccines ready either by the end of 2020 or early 2021.

2) EUR/USD: A Modest USD Pullback Helped Ease Bearish Pressure, For The Time Being

The EUR/USD pair seesawed between tepid gains/minor losses and consolidated its recent fall to two-month lows. Concerns about the second wave of COVID-19 infections continued weighing on investors’ sentiment. This was evident from the risk-off mood through the first half of the trading action on Thursday and drove some haven flows towards the US dollar. This coupled with signs that the economic recovery in the Eurozone could be running out of steam undermined the shared currency and exerted some early pressure on the major.

On the economic data front, the headline German IFO Business Climate Index fell short of market expectations and came in at 93.4 in September. Meanwhile, the Current Economic Assessment arrived at 89.2 points for the reported month as compared to last month’s 87.9 and 89.5 anticipated. From the US, the Initial Weekly Jobless Claims rose to 870K as against a fall to 843K expected from 866K previous. Adding to this, a late rebound in the US equity markets prompted some USD profit-taking and extended some support to the pair.

The market sentiment stabilized a bit amid renewed hopes that the US Congress could break a months-long impasse to agree on the next round of fiscal stimulus measures. Reports indicated that Democrats in the US House of Representatives are working on a $2.2 trillion coronavirus stimulus package. Moreover, the House Speaker Nancy Pelosi could resume stalled stimulus talks with the US Treasury Secretary Steven Mnuchin. However, reviving risk sentiment pushed the US Treasury bond yields higher and helped limit any meaningful USD pullback.

Meanwhile, the pair recovered around 60 pips from daily swing lows, albeit lacked any strong follow-through and remained confined in a range, just above mid-1.1600s through the Asian session on Friday. In the absence of any major market-moving economic releases from the Eurozone, the pair remains at the mercy of the USD price dynamics and the broader market risk sentiment. Later during the North American session, the release of Durable Goods Orders data from the US will be looked upon for some meaningful trading opportunities on the last day of the week.

From a technical perspective, the attempted recovery is more likely to confront immediate resistance near the 1.1700 mark. Any subsequent move up might still be seen as a selling opportunity and runs the risk of fizzling out rather quickly near the 1.1760-65 horizontal support breakpoint. That said, some follow-through buying could trigger a short-covering move and push the pair back above the 1.1800 mark. Bulls might then aim to surpass the 1.1870-75 strong resistance, which if cleared decisively will negate any near-term bearish bias.

On the flip side, bears might now wait for a sustained weakness below the overnight swing lows, around the 1.1625 region. A convincing break below will be seen as a fresh trigger for bearish traders and turn the pair vulnerable to extend the downward trajectory further towards challenging the key 1.1500 psychological mark. The latter coincides with an important confluence region – comprising of the 61.8% Fibonacci level of the 1.1683-1.2011 positive move and 100-day SMA – and should now act as a strong base for the major.

3) GBP/USD: Bears Await A Sustained Break Below 200-DMA, 38.2% Fibo. Level

The GBP/USD pair once again showed some resilience below the very important 200-day SMA and staged a modest intraday bounce on Thursday, albeit lacked any strong follow-through. The British pound got a minor lift after the UK finance minister, Rishi Sunak set out his plan to rescue millions of jobs and businesses from a winter crisis amid concerns that resurgence in the coronavirus cases could derail the UK economy.

In an emergency statement to Parliament, Sunak announced a bit more generous Jobs Support Scheme, wherein the government will subsidise the pay of employees who are working fewer than their normal hours due to lower demand. Employers will pay for hours actually worked and the government will cover two-thirds of the lost wages.

On the other hand, growing market worries about the second wave of coronavirus infections, along with the likelihood of the global economic slowdown continued driving some haven flows towards the US dollar. This comes amid risk of a no-deal Brexit, held bulls from placing any aggressive bets and capped the upside for the major.

The USD struggled to preserve its early gains to two-month tops, instead witnessed some profit-taking following the release of the US Initial Weekly Jobless Claims, which rose to 870K as against consensus estimates pointing to a reading of 843K from 866K previous. Adding to this, a late rebound in the US equity markets dented the greenback’s safe-haven status and extended some support to the pair.

The market sentiment stabilized a bit amid renewed hopes that the US Congress could break a months-long impasse to agree on the next round of fiscal stimulus measures. Reports indicated that Democrats in the US House of Representatives are working on a $2.2 trillion coronavirus stimulus package. Moreover, the House Speaker Nancy Pelosi could resume stalled stimulus talks with the US Treasury Secretary Steven Mnuchin.

The pair held steady just above mid-1.2700s through the Asian session on Friday, though lacked any strong follow-through as investors await fresh Brexit updates before positioning for the next leg of a directional move. Later during the early North American session, the release of the US Durable Goods Orders data might influence the USD price dynamics and produce some meaningful trading opportunities on the last day of the week.

From a technical perspective, the pair, so far, has managed to defend an important confluence support – comprising of 200-day SMA and the 38.2% Fibonacci level of the 1.1412-1.3482 positive move. However, the lack of any strong follow-through buying warrants some caution before confirming that the pair might have bottomed out and positioning for any meaningful positive move.

In the meantime, the 1.2800 round-figure mark is likely to act as immediate strong resistance. A sustained move beyond might trigger some short-covering move and push the pair further beyond the 1.2855-60 region, towards reclaiming the 1.2900 mark.

On the flip side, a convincing break below the 1.2685-75 immediate strong support now seems to accelerate the fall to the 1.2625-20 horizontal support en-route the 1.2600 mark. The pair could then extend the downward trajectory further towards mid-1.2500s before eventually dropping to the key 1.2500 psychological mark.