Daily Market Outlook, March 04, 2020
The Federal Reserve unexpectedly cut the fed funds target range two weeks ahead of the scheduled 18 March meeting, marking its first such inbetween/emergency move more than a decade ago since Oct 2008 during the financial crisis. The preemptive emergency cut reduced the target range by 50bps from 1.5-1.75% to 1.0-1.25%, also its first largest cut since Dec 2008 (-75bps in a scheduled meeting), highlighting the central bank’s concerns over the impact of Covid19 on the US market.
During a press conference, Chair Jerome Powell reaffirmed that the US fundamentals remain strong; the prospect for continued growth remained favourable at the time of January’s meeting: but the spread of the coronavirus has brought “new challenges and risks”. He added that the outbreak’s overall effects on the economy remain highly uncertain, and the situation remains a fluid one. As such, the risks to the U.S. outlook have changed materially, which prompt us to believe that further easing is on the cards. Fed’s move came just after G7’s earlier morning statement from its Financial Ministers and Central Bank Governors that indicates no concrete and immediate actions taken to support the global economy
The Asian market is mostly up following rate cuts. US equity markets finished down despite the Fed’s move as concerns about the economic impact of the coronavirus dominated. However, the rise in Asian equities may also reflect hopes that the Fed’s move will prove part of a global effort by policymakers to boost demand.
In China, the February Caixin services PMI fell to an all-time low of 26.5 (from 51.8 in January) providing further evidence of the severe impact of the virus.
Former Vice-President Joe Biden has moved to the front of the race to be the Democratic nominee for November’s US Presidential election after a better than expected performance on Super Tuesday. The result puts him ahead of his main rival Bernie Sanders with the next round of votes on 10th March.
Today’s testimony by new Bank of England Governor Bailey to a House of Commons Committee will be watched for indications of how he thinks the UK central bank should react to the coronavirus crisis. Yesterday soon to be ex-Governor Carney promised a “powerful and timely” response by global policymakers to the crisis but his comments were short on the specifics of possible actions. Bailey’s comments will also probably try and avoid detail but he is bound to be asked whether the Bank should follow the Fed’s lead. BoE Deputy Governor Broadbent also speaks this evening.
Expectations for today’s Bank of Canada policy update has changed significantly. Until recently it was expected to leave interest rates unchanged. However, in the wake of yesterday’s cuts from the Australian central bank and the Fed, the BoC is also now expected to act, although it is more uncertain whether they will cut by 25bp or 50bp. There will be no press conference after today’s meeting but BoC Governor Poloz is scheduled to speak tomorrow.
RBA cuts 25bps to 0.50% in March Meeting: RBA decided to cut cash rate by 25bps to 0.5% after markets swiftly priced in a cut in recent days. RBA attributed the cut to the Covid-19 outbreak, saying that the “the coronavirus has clouded the near-term outlook for the global economy” and “global growth in the first half of 2020 will be lower than earlier expected”. RBA expects a significant impact on the economy, a shift from February’s “too early to assess”, adding that the uncertainty is likely to affect domestic spending. It mentioned that the Australian government is also ready to support areas affected by the outbreak. RBA said that there will be delay to the economy recovering to full employment and inflation target and signaled that it is prepared to ease monetary policy further. This should increase expectations of further cut to 0.25% in our view.
Low Eurozone inflation and virus threat support more ECB easing: Eurozone flash HICP inflation moderated to 1.2% YOY in February (Jan: +1.4%), reflecting decline in energy prices. Underlying inflation rose to 1.2% YOY (Jan: +1.1%) thanks to slightly higher services inflation. Fall in producer prices eased to 0.5% YOY (Dec: -0.6%), its sixth consecutive month of contraction. Persistently low Eurozone inflation supports the case for further ECB easing in light of the new threat posed by the rapid spread of Covid-19 on the bloc’s economy. On a separate note, unemployment rate was unchanged at 7.4% in January, still a historically low level, adding to signs of a firm labour market.
Today’s Options Expiries for 10AM New York Cut (notable size in bold)
- EURUSD: 1.1000 (EUR804mn); 1.1035 (EUR710mn); 1.1060 (EUR1.7bn); 1.1065 (EUR447mn); 1.1150 (EUR1.5bn); 1.1200 (EUR1.2bn)
- USDJPY: 107.50 (USD843mn); 108.15 (USD408mn)
- AUDUSD: 0.6600 (AUD330mn)
Technical & Trade Views
EURUSD (Intraday bias: Bullish above 1.1140 neutral below)
EURUSD From a technical and trading perspective, as highlighted in the Weekly Market Outlook scale and scope of short squeeze similar to price action seen in August 2018, suggesting a test of offers and stops above 1.12 before a correction back to test bids towards 1.10 UPDATE as 1.1140 supports intraday look for a challenge of year to date highs and offers and stops above 1.1250, this area should prompt some profit taking and a pause that could see a deeper correction ensue to test bids back towards 1.1050/00
GBPUSD (Intraday bias: Bearish below 1.2860 Bullish above)
GBPUSD From a technical and trading perspective, as 1.2860 caps corrections look for a test of the equidistant swing objective sighted at 1.2670, on the day only a close above 1.29 would stabilise prices and delay further downside UPDATE as 1.2860 caps the upside 1.2670/50 becomes the immediate downside objective to complete the broader corrective cycle. On the day a breach of 1.2930 would frustrate bears and delay downside objectives
USDJPY (intraday bias: Bearish below 109.20 Bullish above)
USDJPY From a technical and trading perspective, prices sliced through the pivotal test of daily ascending trendline support and duly exposed bids and stops to 107.50, as 109.20 caps upside attempts bears look for a 106.50 test next, on the day only a close above 109.60 would delay further downside
AUDUSD (Intraday bias: Bearish below .6600 Bullish above)
AUDUSD From a technical and trading perspective the spike below .6500 has attracted bids early in the week a close back through the .6600 handle would suggest the potential for a more sustained correction targeting .6700. A failure to carve out a meaningful low here will open .6350 downside test next
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
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