12/05/2020
12th May Market Analysis:
1) EUR/GBP Tries To Rebound Off 0.87 Support
Global sentiment turned more cautious yesterday. Uncertainty on the pace of the easing of lockdown measures worldwide dented risk appetite. The dollar was in good shape with trade-weighted USD (DXY) regaining the 100 mark. The yen was a remarkable underperformer after a solid performance of the Japanese currency of late. The USD/JPY rise accelerated as US yields jumped higher later in USD dealings (close 107.66). EUR/USD drifted to the low 1.08 area. Overall USD strength and the political bickering on the ruling of the German Court on the ECB PSPP programme kept EUR/USD in the defensive (close at 1.0807).
This morning, Asian markets also started in cautious risk-off mode. Investors ponder the consequences of new local outbreaks of the corona virus. Early in Asian trading, the Aussie dollar lost half a big figure as China suspended imports for meat from four Australian abattoirs, raising fears for trade tensions to flare up. However, the move was rather easily reversed later AUD/USD is again trading in the 0.6480 area. The yen regains some ground after yesterday’s setback (USD/JPY 107.40 area). EUR/USD dropped temporarily to the 1.0785 area (AUD-driven?) but also reversed its decline (currently 1.0815).
Today, the US NFIB small business confidence and the CPI data are interesting but probably with no lasting impact on trading. Several Fed governors will speak. Given recent market pricing of negative FF rates, markets will look for clues whether negative rates are indeed an option for the Fed. For now we don’t expect the Fed to give a clear sign in that direction. The US 10-y bond auction is a wildcard. Question is whether higher yields due to big supply should be seen as USD supportive. Last week, EUR/USD dropped below 1.08 after the German court ruling, but the 1.0727 correction low was left intact. Institutional issues probably will continue to cap any sustained euro rebound. We expect EUR/USD to hold in the lower part of the 1.0727/1.1018 trading range for now.
Sterling underperformed yesterday. EUR/GBP was propelled higher to test the 0.88 area. Confusing communication of the UK government on the easing of the lockdown and persistent headlines on the stalemate in the UK-EU trade negotiations were negatives for sterling. EUR/GBP closed at 0.8762. There are no important UK data today. The EUR/GBP 0.87 area proved to be quite a solid bottom of late. Some further EUR/GBP gains are possible short-term.
2)GBP/USD Fall Below 1.2200 Mark Remains A Distinct Possibility
The GBP/USD pair continued with its struggle to sustain or build on the momentum beyond the 1.2400 mark and witnessed some heavy selling on the first day of a new trading week. The UK Prime Minister Boris Johnson's address about the government’s plan to ease the nationwide lockdown lacked clarity and kept the GBP bulls on the defensive. Adding to this, resurgent US dollar demand further exerted some bearish pressure on the major. As investors looked past Friday's dismal US jobs report, the US dollar was back in demand on the back of growing fears about the second wave of coronavirus infections and got an additional boost from a goodish pickup in the US Treasury bond yields.
On the other hand, the British pound was also weighed down by reports that Johnson was facing Cabinet splits over his move to quarantine all travellers coming to the UK for 14 days. This coupled with the lack of progress in the post-Brexit talks further took its toll on the sterling and dragged the pair back below the 1.2300 round-figure mark. However, speculations that the Fed might be forced to push interest rates below zero kept a lid on any runaway USD rally and helped limit deeper losses for the major. The pair once again showed some resilience below the 1.2300 mark and finally settled around 50 pips off daily lows, though lacked any follow-through despite a subdued USD demand during the Asian session on Tuesday.
In the absence of any major market-moving economic releases from the UK, the pair remains at the mercy of the USD price dynamics and any fresh Brexit-related headlines. Later during the early North-American session, the release of the US consumer inflation figures and scheduled speeches by influential FOMC members will influence the USD demand and produce some meaningful trading opportunities.
From a technical perspective, the near-term bias still seems tilted in favour of bearish traders amid the formation of a double-top pattern near the very important 200-day SMA. A sustained breakthrough the 1.2300 mark, leading to a subsequent fall below last Thursday’s swing low near the 1.2265 region will reinforce the bearish outlook. The pair might then accelerate the slide towards the 1.2200 mark before eventually dropping to test April monthly swing lows, around the 1.2165 region.
On the flip side, any meaningful recovery attempt might still be seen as a selling opportunity and seems more likely to remain capped near the 1.2400-1.2420 supply zone. This is followed by last Friday’s swing high, around the 1.2465 zone, above which the pair is likely to aim towards reclaiming the key 1.2500 psychological mark.
3) EUR/USD Stuck In A Familiar Trading Range, Going Nowhere in A Hurry
The EUR/USD pair edged lower on the first day of a new trading week, albeit remained well within a familiar trading range held over the past one-week or so. As investors looked past Friday's dismal US jobs report, the US dollar was back in demand on the back of growing fears about the second wave of coronavirus infections and was seen as a key factor exerting some pressure on the major. Meanwhile, the latest optimism over the re-opening of the economies in some parts of the world fueled expectations that the global growth might have bottomed. This, in turn, lifted the US Treasury bond yields higher across the board, which remained supportive of the bid tone surrounding the USD.
The pair ended the day near the lower end of its daily trading range and remained depressed through the early Asian session on Tuesday. However, speculations that the Fed might be forced to push interest rates below zero held investors from placing aggressive USD bullish bets and helped limit deeper losses for the pair, at least for the time being. It is worth reporting that the Federal Reserve officials talked down the prospect of negative rates, though traders have been pricing in a small chance of such a move next year. The pair was last seen trading around the 1.0800 mark and remains at the mercy of the USD price dynamics amid empty Eurozone economic docket.
Later during the early North-American session, the release of the US consumer inflation figures might provide a fresh impetus. This along with scheduled speeches by influential FOMC members will influence the USD demand and assist traders to grab some meaningful opportunities. This comes ahead of the Fed Chair Jerome Powell's scheduled speech about the current economic issues on Wednesday, which might play a key role in driving the near-term sentiment surrounding the greenback and help determine the pair's next leg of a directional move.
From a technical perspective, the pair has been trading well below its important daily/intraday moving averages (50, 100 & 200-period SMA) and thus, seems vulnerable to slide further. However, the recent breakthrough a multi-week-old descending trend-line and the emergence of some dip-buying near the mentioned resistance-turned support favours bullish traders. The technical set-up points to an extension of the rangebound trading action and warrants some caution before placing any aggressive directional bets.
In the meantime, any meaningful slide below the 1.0800 round-figure mark might continue to find some support near the trend-line resistance breakpoint, currently near the 1.0740 area. That said, a convincing breakthrough might turn the pair vulnerable to break below the 1.0700 mark and head towards retesting YTD lows, around the 1.0635 region.
On the flip side, the 1.0840-50 region now seems to have emerged as an immediate resistance, above which the pair is likely to aim towards reclaiming the 1.0900 round-figure mark. Some follow-through buying might accelerate the momentum further towards the 1.0975 supply zone en-route the key 1.10 psychological mark and monthly tops, around the 1.1020 region. The latter coincides with the very important 200-day SMA and should now act as a key pivotal point for short-term traders.
