26-Jun-2020

1) EUR/USD: Dead Cat Bounce or Rally from Dual Trendlines? Coronavirus Concerns Are Key
2) GBP/USD: Frosty Brexit Relations, US Coronavirus Record, Downside Momentum All Point Lower
3) Gold to Correct Lower in the Near Term?

 

 

1) EUR/USD: Dead Cat Bounce or Rally from Dual Trendlines? Coronavirus Concerns Are Key

Down but not out – the world’s most popular currency pair is struggling to recover but still holds its ground. EUR/USD’s resilience comes amid a late rally in US stocks on Thursday as investors defied a record number of coronavirus cases in America and also a warning by the Federal Reserve. The safe-haven dollar came under pressure, but will it continue?

Texas Governor Greg Abbott halted the reopening of the state amid an acceleration in COVID-19 hospitalizations which is putting pressure on health systems. Cases continue rising in Florida, California, and most US states. Moreover, the Center for Disease Control said that the real number of infections is probably 23 million – ten times the current count.

However, President Donald Trump stated the US will not impose shutdowns and that economy will roar forward. The Federal Reserve does not seem to share the same optimism, as it ordered banks to refrain from increasing dividends for the second quarter and refrain from buyouts in the third one. The Fed wants commercial banks to have more funds in case of a downturn.

Nevertheless, stocks found their feet and bounced. The same Fed also provides massive support to markets, and perhaps investors were also encouraged by some of the data points. Durable Goods Orders surged by 15.8% in May, beating expectations and showing a substantial rebound after April’s downfall.

Jobless claims were mixed, with initial claims remaining stubbornly high around 1.5 million and continuing applications dipping below 20 million. Friday’s figures are also of interest. Personal Income – which leaped by over 10% in April – has likely dropped in May. On the other hand, Personal Spending probably took the other direction, surging in May after tumbling in April.

Christine Lagarde, President of the European Central Bank, delivers a speech later in the day and may comment on the current economic situation and potential further stimulus. The ECB defied the German Constitutional Court’s partial rejection of the bank’s bond-buying scheme and expanded its purchases earlier this month.

Lagarde will likely reiterate the Frankfurt-based institution’s commitment and will also call on politicians to play their part. Ursula von der Leyen, the President of the European Commission, urged leaders to agree on her proposed EU Fund – an ambitious plan including €500 billion in mutually funded grants – before the summer holidays. However, disagreements have resulted in leg dragging.

Zooming out on the four-hour chart all the way to early May shows a long-term uptrend support line that is now hitting chart close to the current price. A more moderate uptrend dating back to late May is also providing support. Will this convergence prevent EUR/USD from falling?

Momentum remains to the downside while this week’s slide from the highs sent euro/dollar below the 50 and 100 Simple Moving Averages. However, the pair is still above the 200 SMA.

Support awaits at the recent low around 1.1190, followed by Friday’s low of 1.1165. The next line to watch is 1.1080, which was a stepping stone on the way up in early June.

 

2) GBP/USD: Frosty Brexit Relations, US Coronavirus Record, Downside Momentum All Point Lower

“Some of the EU’s unrealistic positions will have to change if we are to move forward” – David Frost’s frosty comments have added to the pessimism about Brexit talks and are weighing on the pound. Frost, the UK’s top Brexit negotiator, spoke ahead of the first face-to-face talks with the bloc due on Monday.

Michel Barnier, his opposite number in Brussels, sees a real breakthrough coming only in October. Without a deal, Britain will fall to unfavorable World Trade Organization terms in 2021 – only six months away. These recent comments diminish the optimism after Prime Minister Boris Johnson’s call with EU officials.

The second factor weighing on GBP/USD is the surge in US coronavirus cases. Daily infections neared 40,000, a record. While mortalities are trending lower, concerns that health systems will be unable to cope have led Texas to halt its plans to reopen the state’s economy. The Center for Disease Control (CDC) warned that maybe 23 million Americans were infected, ten times the official figures.

President Donald Trump, who is down in national and battleground polls, insisted that the US economy will not shut down but rather roar forward. Durable Goods Orders for May pointed to a rebound, surging by 15.8%, better than projected. However, weekly jobless claims have remained close to 1.5 million, a stubbornly high level.

Personal Spending and Personal Income figures for May are due out on Friday and will be of interest, competing with coronavirus statistics. Stock markets staged a late rally on Thursday but investors may prefer to take bets off the table ahead of the weekend.

The Federal Reserve requested banks to refrain from buyouts and dividends in order to preserve their strength amid rising uncertainty. That may also weigh on sentiment. The University of Michigan’s final Consumer Sentiment Index gauge for June will have the last word of the week.

Pound/dollar is capped by the downtrend support line that accompanies it since mid-June. It has recently dipped below the 200 Simple Moving Average on the four-hour chart and momentum turned negative – bearish signs.

Support awaits at 1.2380, a recent trough, followed by 1.2340, Friday’s low. Further down, 1.23 and 1.2250 date back to late May and early June.

 

3) Gold to Correct Lower in the Near Term?

The general consensus among most analysts is for gold upside in the short and medium term. A recent piece on Bloomberg’s Market Live Blog is making a case for a gold correction in the near term. The logic for the correction was as follows:

The central bank stimulus has now been priced in and the reflation trade is now faltering.

The financial system is not collapsing, yet core gold bullishness is based on the fear that central bank liquidity will devalue fiat currencies and lead to inflation combined with safe haven demand.

Therefore, recent bullishness is overdone and it is reasonable to expect some correction in gold over the coming weeks

On the same day Bloomberg’s Marekt’s Live blog also had a piece arguing for more gold upside. The logic of that piece was as follows:

The Rising COVID-19 cases in the US will further increase the economic damage already inflicted.

This above point means the odds for further losses have risen for shares and more Fed stimulus can be expected to come. Both should aid gold upside.

The Fed have already made it clear they are willing to increase stimulus with Fed Vice Chairman Richard Clarida saying the Fed is prepared to take additional steps if necessary.

So, there we have two opposing views on gold. So, what is your take on gold? The medium term picture for gold upside remains intact, especially with record low interest rates and more stimulus potentially on the way with rising COVID-19 cases.

However, in the short term it is a more open question whether we will see more upside in gold or whether a correction is due. Remember that heavy stock selling has also been weighing on gold recently, so that could hinder higher prices. If gold does indeed correct how far down could it fall? The $1680 is obvious near term support and bulls would be expected to reload at that point in the current climate. It was telling that the article making a case for near term gold bears was not making a case for general medium term gold bearishness. The bullish picture remains in place, even with a short term bear. To invalidate the bullish outlook for gold the market would need to see news of a successful vaccine for COVID-19.