30-Nov-2020

1) EUR/USD: Fakeout at 1.20? Why the Euro May Suffer A Downward Correction
2) GBP/USD: Brexit, Powell and Nonfarm Payrolls Promise A Hectic Start To December
3) XAU/USD: Gold Looks to $1750 amid Coronavirus Vaccine-Driven Optimism
4) The US Dollar Finally Succumbed To All the Pressure This Morning

 

 

1) EUR/USD: Fakeout at 1.20? Why the Euro May Suffer A Downward Correction

Light at the end of the tunnel – and also 1.20 is within reach – but a downtrend correction cannot be ruled out as EUR/USD hits a three-month high.

The good news pushing the euro higher comes from the vaccine front. British regulators could be the first out the door in approving the Pfizer/BioNTech COVID-19 vaccine. As BioNTech is a German firm, approval in the EU will likely follow shortly. Moderna’s inoculation will likely follow. Even if European and American authorities wait longer, the first immunization program to receive the green light in the West is set to boost markets.

The US dollar has also been on the back foot as investors take profits on stocks and buy US bonds. The drop in yields is making the greenback less attractive.

On the other hand, coronavirus is still rampant in the US – where hospitalizations have hit a new high above 93,000 – and Germany. The drop in US infections is likely temporary, a result of reporting issues around the Thanksgiving holiday. Contrary to Spain and France, the old continent’s largest economy is struggling to contain the disease and has extended its “lockdown light. “

Germany’s economy minister said that that the covid numbers are still “much too high” in most regions. Such comments may limit any euro gains.

The common currency may also struggle with updated inflation figures. Spain and Germany are set to report preliminary Consumer Price Index statistics for November and they will likely serve as a reminder of economic weakness. Christine Lagarde, President of the European Central Bank, is set to speak later and repeat her message of adding stimulus in the upcoming meeting.

The case for a “fakeout” – a quick move above 1.20 before a sharp correction lower – also comes from end-of-month flows. After EUR/USD advanced from the 1.16 handle early in the month, money managers may balance their portfolios and sell the common currency.

All in all, the trend remains to the upside, but another leg higher could trigger a downfall.

Euro/dollar continues trading above the 50, 100, and 200 Simple Moving Averages on the four-hour chart, but the Relative Strength Index is battling the 70 level – pointing to overbought conditions. This development also adds to the case of a downward correction.

Initial resistance awaits at the daily high of 1.1978. Above the round number of 1.20, the critical level to watch is the 2020 peak of 1.2010. Above that hurdle, the world’s most popular currency pair is back to levels last seen in 2018, with 1.2095 as the next target.

Support awaits at 1.1940, a peak seen last week. It is followed by 1.1920, a high point recorded in mid-November, and by 1.1895.

 

2) GBP/USD: Brexit, Powell and Nonfarm Payrolls Promise A Hectic Start To December

An exit from the pandemic is more powerful than a Brexit deal – at least in unleashing late November’s rally. EU-UK negotiations remain significant, but also, the calendar is making a welcome comeback, with a full slate of US economic indicators.

The word “imminent” received a new meaning, as reports of upcoming trade deals failed to materialize. Investors seemed to be aware that 95% of the details are already agreed – as one headline suggested – and wanted to see white smoke on the remaining 5% of thorny issues, including fisheries and governance.

At the time of writing, negotiators continue talking online, due to a positive coronavirus test of one of the members. At one point, officials suggested an interim deal that would prevent the gap between reaching an accord and the lengthy ratification process needed. Markets seemed unaffected by another Brussels-made can-kicking exercise.

Vaccine: Another Monday, another vaccine breakthrough – and this time a British-grown one. AstraZeneca and the University of Oxford reported an average efficacy rate of 70% and 90% when a lower dosage regimen was applied.

While the confusing preliminary findings cause a jittery reaction at first, markets eventually saw the glass half-full – Astra’s immunization works, needs only normal refrigerating temperatures, and is set to be mass-produced. The news turned into a win-win situation for GBP/USD bulls as the UK secured a large number of doses – boosting sterling – and the safe-haven dollar was on the back foot.

In the meantime, COVID-19 cases resumed their decline in Britain while rising in America.

Prime Minister Boris Johnson’s announcement regarding restrictions caused a mixed response. On one hand, the government is letting the nationwide lockdown to lapse on December 2. On the other hand, localized lockdowns are set to be tighter than beforehand, potentially curbing economic activity.

In the US, state governors have ramped up recommendations and restrictions ahead of Thanksgiving as hospitalizations continue climbing at an alarming clip. Outgoing President Donald Trump remains focused on contesting the elections rather than the virus, yet he finally authorized to transition to President-elect Joe Biden. The move came as more states certified the results and amid growing pressure from Republican lawmakers.

Markets were relieved by Trump’s tacit concession – reducing the chances of a bumpy transition. Moreover, US media reported that Janet Yellen would be the next Treasury Secretary, giving markets another reason to be cheerful and push the safe-haven dollar down. The former Fed Chair would support expansive policy yet without going too far toward left-leaning policies.

Economic data made a surprising comeback. Markit’s US Purchasing Managers’ Indexes beat estimates, pointing to sustained growth and sent the dollar higher. The greenback reacted with less fervor to a miss in the Conference Board’s Consumer Confidence gauge.

UK PMIs came out marginally above estimates.

All in all, optimism about an upcoming vaccine in the UK and a smooth US transition outweighed Brexit uncertainty and upbeat US data.

Deal or no deal? The eternal question may be finally answered as the page turns to December. Without an accord or an interim solution, the UK would revert to unfavorable World Trade Organization terms at the end of the month.

Markets are not fully pricing a deal, leaving sterling room to move higher. However, the risk is asymmetric, with an unexpected collapse in negotiations probably triggering a massive sell-off. A meeting between PM Johnson and European Commission President Ursula von der Leyen could seal an accord, and even setting such a summit would probably boost the pound.

Health Secretary Matt Hancock mentioned December 1 as the potential beginning of a wide vaccination campaign. While that goal will likely be missed, regulatory approval of any immunization scheme would likely support sterling. Vaccination will likely be prioritized for medical staff, caregivers, and vulnerable people.

COVID-19 statistics remain of high interest, especially those in London, one of the world’s financial capitals. Restrictions in the metropolis have an outsized impact on the pound.

The British economic calendar is light, with final PMIs unlikely to significantly alter the original reads for November.

How high will US covid statistics go? While the impact of Thanksgiving travel will likely be reflected in statistics only, the rising figures may move markets later on. Investors will likely take note if average daily deaths surpass the previous peak or if hospitalizations top 100,000.

President-elect Biden will likely address the topic and any hint of a federal action to curb the spread could hurt markets and boost the safe-haven dollar.

On the vaccine front, there is a chance that the Food and Drugs Administration approves the Pfizer/BioNTech immunization for emergency use. While such a move is expected, it would likely provide a shot in the arm to markets and weigh on the safe-haven dollar.

As the dust is settling on the political scene after Yellen was nominated Treasury Secretary, the focus return to her successor at the central bank. Jerome Powell, Chairman of the Federal Reserve, will testify on Capitol Hill on Tuesday. Markets will try to assess if the Fed is on course to expand its bond-buying program in December or remain on the sidelines for longer. The dollar could drop if he hints at an imminent move and rises if Powell is reluctant to act.

The economic calendar is hectic, with a full buildup to Friday’s Nonfarm Payrolls. The first clue toward the jobs report comes on Tuesday with the ISM MAnufacturing PMI for November, projected to edge down from elevated levels. The employment component will be closely watched.

ADP’s private-sector labor statistics have been missing the mark in recent months, yet could move markets. A faster increase is on the cards in Wednesday’s publication.

Thursday is a busy day, including the ISM Services PMI and its employment component – relevant for most American jobs. Weekly jobless claims may steal the show after two consecutive increases, the worst since July. A jump above 800,000 could hit sentiment – even though the application’s data is for the period after the NFP surveys are conducted.

Finally, Friday’s Nonfarm Payrolls figures for November serve as a test to the recovery. Is it slowing down amid the increase in the virus, or does the US economy still have momentum? Expectations stand at 520,000 – which is slower than October’s rise of 638,000 but well above pre-pandemic averages.

The Unemployment Rate is set to extend its decline to 6.8% while wages carry expectations for edging up to 4.6%, still above 2019 levels.

Pound/dollar is attempting to break above the uptrend channel that has been accompanying it since late September. Even without a decisive move higher, the broad trend remains bullish – upside momentum on the daily chart has strengthened and the Relative Strength Index is below the 70 level, thus outside overbought conditions. The price is well above the 50-day, 100-day, and 200-day Simple Moving Averages.

The recent two month high of 1.3397 is the immediate and stubborn resistance line. The next cap is 1.3495, which is the yearly high recorded in September, followed closely by the December 2019 peak of 1.3510.

Support is at the former double-top of 1.3310, followed by 1.3275,  a peak in August and also a support line during November. The next considerable cushion is at 1.3180, which held GBP/USD down in October. It is followed by 1.31 and 1.30.

 

3) XAU/USD: Gold Looks to $1750 amid Coronavirus Vaccine-Driven Optimism

Gold (XAU/USD) remains exposed to further downside risks heading into the critical NFP week this Monday, especially after the metal breached the $1800 threshold and closed the week below that level. Gold eroded 4.5% over the week while on track to book the worst month in four months. The spot has lost over $300 since it reached record highs of $2075 in August.

Early Monday, gold witnessed a fresh 15-pips drop and renewed four-month troughs at $1765, as the sell-off resumed amid ongoing optimism surrounding the coronavirus vaccine optimism, suggesting a swifter global economic rebound next year. The economic optimism dulls gold’s safe-haven allure. Further, US banking giants – Citi and Goldman Sachs lowered their gold-price forecasts for 2021, which also collaborates with the weakness in the metal.

In the day ahead, gold could take cues from the second-tier US Pending Homes Sales data and sentiment on Wall Street.

The hourly chart shows that gold could attempt a rebound from multi-month lows, as the Relative Strength Index (RSI) is heavily oversold at 25.46. The confluence of the daily high and bearish 21-hourly moving average (HMA) at $1790 could limit the bounce.

Overall, the risks remain skewed to the downside, as the price has breached the week-long descending trendline support at $1771. The next relevant downside target is seen at $1758, the July 2 high. The $1750 psychological level will be the level to beat for the bears.

 

4) The US Dollar Finally Succumbed To All the Pressure This Morning

The US dollar finally succumbed to all the pressure this morning. The trade-weighted greenback changes hands below 91.73/91.75 support. The former is the 76% retracement level of the 2018-2020 dollar rally while the latter is the 2020 low. A sustained break lower would set the stage for a fresh bout of dollar weakness. The mirror image in EUR/USD shows the pair in the high 1.19-zone for the first time since early September, charging for an attack of EUR/USD 1.2011 (YTD high)/1.2102 (76% retracement of 2018-2020 decline) resistance. USD/JPY sinks back below 104. US eco data could be pivotal. Better than expected November PMI’s temporarily saved the US currency last week. This week we’ll get the Chicago PMI (today), manufacturing ISM (tomorrow), ADP employment change (Wednesday), weekly jobless claims, non-manufacturing ISM (both Thursday), and nonfarm payrolls (Friday). Next week then sees the final Fed meeting of the year with last week’s Minutes suggesting new (stronger) guidance on the central bank’s (net) asset purchases. Since June, the US central bank has been buying $80bn Treasuries and $40bn mortgage securities each month and they promised to do so “over coming months”.

Most Asian stock markets cede ground this morning (up to -1.5%) with China escaping the drop. November China PMI’s beat forecasts (composite at 56.4 from 56.2) while the PBOC unexpectedly injected liquidity into the system. The Chinese yuan is somewhat softer even against a weak dollar. USD/CNY trades just below 6.60. General risk sentiment is soured after Reuters reported that the Trump administration aims to add more Chinese companies to a list of firms blocked from American investment. Core bonds trade with a small upward bias with European futures pointing at a softer opening. A more guarded risk sentiment could temper the dollar’s faint, though that traditional negative correlation wasn’t really strong of late. Brent crude falls below previous resistance ($47.3/b) after an informal OPEC+ meeting didn’t yield the longed-for deal to delay the tapering of production cuts by one quarter from January 2021 to April 2021. Oil ministers hold the official scheduled conference today and tomorrow.

EUR/GBP on Friday tested the psychological 0.90 mark, but a break higher didn’t occur. Sterling takes the upper hand this morning after the Telegraph reported that the EU and UK seemed to settle their trade dispute on fisheries, removing at least one hurdle to a last-minute accord. EU leaders meet this week to discuss the next budget and pandemic-related fiscal support, but their gathering could also be used to discuss the state of Brexit talks in case of a breakthrough.

The EC is working on proposals to make it easier to remove non-performing loans from banks’ balance sheets as it braces for an insolvency surge next year after several support programs fade out. Among the ideas floated are measured to enhance the secondary market for the sale and purchase of bad loans and a network of national bad banks. Head of the ECB supervision Enria’s proposal for a European-wide bad bank fails to gain traction.

China’s PBOC injected 200bn yuan through its medium-term lending facility (1 year) at an unchanged rate of 2.95% and said it would conduct another operation in December to roll over loans maturing that month. The unexpected move is seen as trying to calm down market nerves after a series of bond defaults. The PBOC also injected a net 110bn yuan via reverse repo’s on Monday.

In a draft plan seen by the FT, the EU wants to bury the tensions of the Trump era with the US and urges it to seize the “once-in-a-generation” opportunity to build a new global and strategic alliance to protect its interests against “authoritarian powers”, including the likes of China. The paper proposes new cooperation on digital regulation over tackling Covid-19 to deforestation.