29-Apr-2020

1) EUR/USD Has Been Clinging To Its Range as Europe Edges toward Reopening
2) Asia Surges into the Bull Market FOMO Zone
3) GBP/USD Hovers around 1.2450 amid Ongoing UK Lockdown

 

 

1) EUR/USD Has Been Clinging To Its Range as Europe Edges toward Reopening

Gaining energy for a big move – the world’s most popular currency pair awaits 24 hours of top-tier events that may trigger high volatility.

The US publishes its initial estimate of Gross Domestic Product in the first quarter – providing a broad overview of coronavirus carnage. The economy likely contracted despite being shuttered only at the end of March. Personal consumption stands out as the primary component. Economists expect an annualized fall of 4%, the worst since the crisis, ahead of a double-digit squeeze in the second quarter.

The Federal Reserve probably already has the growth figures as it prepares to announce its decision later in the day. The world’s most powerful central bank will likely leave its policy unchanged but is set to publish new economic forecasts. It usually publishes projections in its March meeting, but officials skipped that planned event as they were busy providing stimulus throughout March.

The action included slashing rates to zero, launching unlimited Quantitative Easing, enacting swap lines with other central banks, and more. Only this week, the Fed has expanded its municipal bond-buying scheme. The Fed’s balance sheet is nearing $7 trillion.

Jerome Powell, Chairman of the Federal Reserve, will hold a press conference in which he will likely reiterate his commitment to supporting the economy. However, markets are addicted to stimulus and may be disappointed without new announcements.

The European Central Bank is scheduled to deliver its decision on Thursday, with growing pressure to expand its extraordinary Pandemic Emergency Purchasing Program (PEPP) currently worth €750 billion. Italy, the country hardest hit by the epidemic, continues struggling with its finances.

Italian bonds are under pressure after Fitch downgraded its credit rating to BBB-, just one notch above junk status, yet set a stable outlook. France and Spain both laid down detailed – and conditional – plans to exit their lockdowns throughout May and June.

Germany has suffered a setback, with growing infection rates that may force the continent’s largest economy to reimpose restrictions. Lifting lockdowns and then reinstating them not only postpones the return to normal economic activity but also deals a blow to consumer and business confidence.

Germany’s preliminary Consumer Price Index figures for April published on Wednesday will likely show a substantial downfall in inflation, potentially adding pressure on the ECB to act, yet it is divided along the same north-south lines as EU leaders.

The spread of COVID-19 is slowing down in Europe and also in the US, and pressure is growing to reopen the economies. Policymakers have a hard time balancing between economic and health considerations. The two-week delay between taking measures and the effect on health systems further complicates the picture.

Euro/dollar has been confined to a range, with strong resistance awaiting at 1.0890, Tuesday’s top, the place where the 200 Simple Moving Average on the four-hour chart hits the price, and a resistance line from last week. It is followed by 1.0930, 1.0995, and 1.1050.

The bottom of the range is 1.0810, the low point on Tuesday and support line from mid-April. It is followed by 1.0770, 1.0730, and 1.0640.

 

2) Asia Surges into the Bull Market FOMO Zone

Asian markets have surged this morning, dragged higher by jumps in S&P e-mini futures and a strong rally by WTI this morning. Sentiment has been further buoyed by better than expected earnings from Alphabet Inc. overnight, as well as the MSCI Asia Pacific Index crossing the 20% threshold and entering an official bull market.

The latter does make me cringe, especially when the press is awash with similar headlines this morning. But then I have never liked running with the herd, especially ones full of bulls. Financial markets globally, continue to delusionly price in a semi-rapid to normality in the world as economies tentatively return from COVID-19 lockdowns. That is not going to happen in the slightest. A reality check should be the levels of government intervention and support in the global economy so far. That will all have to be paid back, but big Government will be back in a very 70/80’s manner for some time.

What is true, though, is that the world’s central banks seem to be prepared to back-stop the poorest of investment decisions to keep the lights on in the global economy. The Federal Reserve’s move to buy “high yield” debt in vast quantities if necessary, effectively signalled that. The ECB has removed its country-specific limits on individual bonds to obtain as well, marking a high yield-lite strategy. The BOJ has been buying everything for quite some time, including ETF’s on the stock exchange for some reason.

Little surprise then that equities globally are or have moved into “official” bull markets. Or that the market itself is painting a narrative to explain it. Direct debt monetisation by other central banks, including our own in Indonesia, is also occurring regularly, with even the Reserve Bank of New Zealand suggesting negative rates are not of the table. I am so glad I am long property there.

When central banks plug their fingers in holes in the dike in one place, leaks tend to occur in other areas. In this case, those leaks may well manifest themselves in the form of inflation, as gigantic government borrowing requirements crown out the private sector. Peak globalisation and supply chains that have a national, rather than international look about them, thus raising costs, will also assist. Investors should be clear in differentiating central bank largesse back-stopping investment decisions, from economic reality. Reality usually wins in the end, but that economist “return to the mean” can take a long time to manifest. There is a world of difference between a bull market, and bs.

Still, that does not mean that momentum will fade anytime soon. Far from it, in fact. The bulls have the upper hand this week for sure, with a dovish outlook from the FOMC and further easing from the ECB sure to please. Big tech continues to report this week, with Microsoft and Facebook next up today. We also have US GDP this evening, with the US expected to have contracted by 4.0% in Q1. Even that staggering number will likely be ignored though, as markets prefer to take hope from the partial reopening of States across the nation. Even ones like Florida, where the COVID-19 death rate is still increasing. Like inflation, the limits of monetary policy, and the competence of government’s leadership across the world, a COVID-19 second wave is a story for another day. Bask instead on Asia joining the “20%” FOMO club.

As I have stated, Asian stocks have risen this morning as US index futures rallied strong, with the S&P e-mini up over 1.20%, and the NASDAQ futures are rising 1.50%. The street is pricing in a very dovish outlook from the FOMC this evening, which should surprise no-one and more strong news from big-tech Q1 earnings, after the Alphabet Inc. results. With strongly positive momentum, even a poor US GDP print this evening will likely be twisted as backwards looking and ignored.

Japan is on holiday today, but the rest of Asia is performing well. Mainland China’s Shanghai composite has risen 0.50% and the CSI 300 by 0.70%. The Korean Kospi is 0.70% higher with the Straits Times 0.50 higher, and the Hang Seng up 0.25%. Regional markets, Jakarta and Kuala Lumpur, have climbed 0.50%.

Australia continues to perform strongly on the global recovery story and their exits from COVID-19 lockdowns. The ASX 200 and All Ordinaries have jumped 1.20%.

We fully expect Europe to pick up the baton, as they did yesterday, and continue with the rally started in Asia. With the US ignoring the rest of the stock markets results, only slip-ups by Facebook and Microsoft will upset the boat.

 

3) GBP/USD Hovers around 1.2450 amid Ongoing UK Lockdown

GBP-USD is trading around 1.2450, within its range. The UK lockdown is set to extend amid a lack of testing and tracing means. The dollar is on the back foot ahead of critical US events.

From a technical perspective, the pair on Tuesday failed to find acceptance above an important confluence barrier comprising of the 61.8% Fibonacci level of the 1.2648-1.2247 recent downfall and a one-week-old ascending trend-line. The mentioned hurdle should now act as a key pivotal point for the pair’s next leg of a directional move. A sustained break through now seems to set the stage for a further near-term appreciating move towards the 1.2600 round-figure mark en-route monthly tops, around the 1.2645-50 regions.

On the flip side, immediate support is pegged near mid-1.2400s (50% Fibo. level), though the bears are likely to wait for a convincing break below the 1.2400 confluence support. The latter comprises of 38.2% Fibo. level and 200-hour SMA, which if broken decisively might be seen as a key trigger for bearish traders and negate the constructive outlook. The pair might then accelerate the slide further towards the 1.2340-35 horizontal support before eventually dropping to challenge the 1.2300 round-figure mark.

Some aggressive US dollar selling through the early part of Tuesday’s trading action assisted the GBP/USD pair some follow-through traction and climb to over one-week tops. The upbeat market mood, supported by the latest optimism over the gradual re-opening of the economies, undermined the greenback’s relative safe-haven status and turned out to be one of the key factors that drove the pair higher. Bulls, however, struggled to preserve the early gains beyond the key 1.2500 psychological mark amid a turnaround in the US equity markets, which prompted some selling at higher levels and led to near 100 pips intraday pullback.

This comes on the back of increasing prospects of an extended lockdown in the UK and persistent uncertainty over the severity of the economic damage caused by the coronavirus pandemic. Adding to this, resurfacing concerns about hard-Brexit also took its toll on the sterling and contributed towards capping the upside. The pair finally settled nearly unchanged for the day, albeit managed to hold above the 1.2400 round-figure mark and regain some positive traction during the Asian session on Wednesday amid a notable USD weakness.

There isn’t any major market-moving economic data due for release from the UK and hence, the USD price dynamics might continue to act as an exclusive driver of the pair’s momentum on Wednesday. Later during the North-American session, important US macro data and the latest FOMC monetary policy decision will play an important role in providing some meaningful directional impetus. The advance US GDP report is expected to show that the economy contracted by 4.0% annualized pace during the first quarter of 2020. Meanwhile, the Fed is due to issue a statement at 1800 GMT, which will be followed by Chairman Jerome Powell’s post-meeting press conference at 1830 GMT. Investors will look for fresh clues about the Fed’s future policy path, which should influence the near-term USD direction.