31-Aug-2020

1) GBP/USD: Sterling Suffers From Trio Of Troubles, Further Pounding On Cards
2) EUR/USD: Bulls Ready To Restart The Rally, Investors Have Reasons To Ditch The Dollar
3) Gold: XAU/USD’s Daily Closing Above 21-DMA Is Critical For A Test Of $2000

 

 

1) GBP/USD: Sterling Suffers From Trio Of Troubles, Further Pounding On Cards

GBP/USD is suffering from a hangover – even before the long bank holiday weekend ends.

First, Brexit has returned from the beach and the backburner to center stage and sterling is suffering. French Foreign Minister Jean-Yves Le Drian said that Brexit talks are stuck due to the UK’s “intransigent and unrealistic attitude.” His words came after David Frost, the UK’s chief negotiator, said that he is ready to walk away from the negotiating table.

The Brexit transition period expires in exactly four months and if there is no accord, Britain reverts to unfavorable World Trade Organization rules. While there is still time to clinch a deal, the acrimonious atmosphere is weighing on the pound.

The second thing tanking sterling is taxes – Chancellor of the Exchequer Rishi Sunak is reportedly mulling raising around £30 billion in various ways, plugging a hole in UK finances. Apart from investors’ dismay at the idea, fellow Conservative MPs have expressed anger at these prospects.

Despite having a large majority in parliament, Prime Minister Boris Johnson depends on support from his backbenchers, especially after a poll showed opposition Labour catching up with his party. Growing criticism – mostly about handling coronavirus but also about reopening schools and taxes – is making Johnson’s job harder.

The third reason for the downfall is profit-taking. Pound/dollar took full advantage of dollar weakness on Friday, soaring to the highest since December 2019 and exceeding the gains of peers such as the euro.

The greenback declined following the Federal Reserve’s dovish policy change – prioritizing full employment at the expense of allowing inflation to overheat. That means keeping interest rates lower for longer, dollar negative. After Federal Reserve Chairman Jerome Powell announced the change last week, Vice Chair Richard Clarida will speak later on Monday.

The Relative Strength Index on the four-hour chart is still around 70 – indicating overbought conditions. That implies the correction is not over just yet. Momentum remains to the upside and GBP/USD is still above the 50, 100, and 200 Simple Moving Average, signaling that in the bigger scheme of things, the uptrend remains intact.

Some resistance is at 1.3220, which was a temporary cap on the way up. More importantly, the fresh 2020 high of 1.3370 is strong resistance. Above that, the post-election peak of 1.3510 awaits GBP/USD.

Support is at 1.3265, a peak in mid-August, and it is followed by 1.3180 1.3150, and 1.3120 – all stepping stones on the way up.

 

2) EUR/USD: Bulls Ready To Restart The Rally, Investors Have Reasons To Ditch The Dollar

Clinging to the holiday tranquility on the last day of August – that is how EUR/USD is kicking off a busy week. A bank holiday in the UK and consolidation of previous gains are behind the calm – yet a storm may already be brewing.

US Non-Farm Payrolls await traders at the other end of the week and positioning may already begin now. Bulls have several reasons to be cheerful and expect the rally to resume.

First and foremost, the Federal Reserve’s dovish shift continues weighing on the dollar. The world’s most powerful central bank will allow inflation to overheat and employment gains to materialize before raising rates. After an initial choppy reaction to the announcement, the narrative of a weaker dollar took hold and is unlikely to change anytime soon.

Will European Central Bank President Christine Lagarde follow the footsteps of her American colleague Jerome Powell? Even if the inflation hawks at the German hawks sign off a shift to allow higher consumer prices – highly unlikely – inflation remains depressed.

Preliminary Consumer Price Index figures for August are due out throughout the European morning and are set to show that inflation is going nowhere fast i staying far from the ECB’s 2% target.

Overall, the Fed’s dovish shift is set to pressure the dollar while the prospects of lower rates for longer are already baked into the euro’s price. Federal Reserve Vice-Chair Richard Clarida will speak later in the day and will likely repeat Powell’s message from last week’s virtual Jackson Hole Symposium. Clarida has been one of the architects of the policy review.

Another reason to shy away from the greenback stems from hopes for developing a coronavirus vaccine. The US Food and Drugs Administration (FDA) said it is ready to fast-track such immunization if benefits outweigh the risks. China’s Sinovac has already received authorization for a COVID-19 vaccine that will be administered to high-risk patients.

Optimism about a solution is pushing stocks higher and diminishing demand for the safe-haven dollar.

Coronavirus cases continue rising in the old continent, with French officials sounding more concerned than beforehand and Spain’s situation worrying investors as well. For now, the deterioration still seems under control and does not hurt the euro. That may change, but probably not anytime soon.

US COVID-19 cases have topped six million, but are on a downtrend. Mortalities are still high, with nearly 1,000 Americans losing their lives on average every day, but as long as there is no deterioration, investors seem calm.

Overall, there are risks to EUR/USD’s advance, but the broad trend is to the upside.

Euro/dollar is trading above the 50, 100, and 200 Simple Moving Averages on the four-hour chart and benefits from upside momentum. The Relative Strength Index is below 70, thus outside overbought conditions.

Resistance awaits at 1.1930, the daily high, followed by 1.1965 – the two-year high recorded in mid-August. Further above, the psychologically significant 1.20 level is looming.

Support is at 1.1880, a swing high from last week, followed by 1.1850, which was a stubborn cap before the rally. The next levels to watch are 1.1750 and 1.17.

 

3) Gold: XAU/USD’s Daily Closing Above 21-DMA Is Critical For A Test Of $2000

Gold (XAU/USD) builds on Friday’s 1.20% rally and trades near the highest levels in two weeks, as the bulls continue to cheer the Federal Reserve (Fed) Chair Jerome Powell’s dovish stance, which reinforced expectations of low-interest rate regime for an extended period. Although gold appears to lack follow-through as the sentiment on the global equities remains buoyed by the Fed’s dovish narrative.

Despite the struggle, the path of least resistance appears to the upside for the yellow metal, as the US dollar remains less favored against its major competitors, in the wake of the record-breaking rally in the US stocks that contributes to the upbeat market mood. Further, uncertainty about the US fiscal stimulus and rising election risks continue to bode well for gold. Meanwhile, the technical outlook also remains constructive after last week’s upsurge.

A symmetrical triangle breakout was confirmed on Friday after gold closed the week above falling trendline (pattern) resistance at $1950.

Therefore, the bulls remain in control starting out a fresh week, with the hourly Relative Strength Index (RSI) pointing north above the midline.

Despite the upbeat momentum, the price is struggling to make a decisive move past the horizontal 21-daily Simple Moving Average (DMA), currently at $1970. A daily closing above that level is needed to extend the bullish break towards the July high of $1985. Acceptance above the July high will call for a test of the $2000 mark.

On the flip side, should the price deliver a daily closing below $1950, the abovementioned resistance now turned support, the near-term bullish bias could likely weaken. The next cushion is seen at Friday’s low of $1923.