Daily Market Outlook, May 18, 2020
Expectations of further policy stimulus has provided a positive backdrop for the market at the start of the week. Most major Asian indices are trading higher, while European and UK futures point to gains ahead.
Comments from Fed Chair Powell, late on Friday, suggested that the Fed was ‘not out of ammunition’ and could do more if needed. In an interview with the Telegraph, Bank of England Chief Economist Haldane noted that the Bank would continue to review all policy stimulus options – including whether to move rates into negative territory and/or purchase more riskier assets under its Asset Purchase Facility.
Last week has seen a generally less positive mood in markets. Concerns about the speed of the economic rebound, and indications of growing tensions between the US and China, have both been cited as reasons for the deterioration in sentiment. Some signs of a second round of Covid-19 in China and South Korea have been noted but despite that, a growing number of countries are announcing some easing in lockdown restrictions. Comments from both US Fed Chair Powell and BoE Governor Bailey highlighted concerns that recoveries may be slow and that there are risks that the downturn may cause more permanent damage to economies. The change in sentiment is also boosting expectations of further policy action to support growth.
In the UK and US, there has been some speculation that interest rates may be cut below zero. However, both Powell and Bailey stated that this was not something that was being considered for now and instead other policy options were favoured including additional QE.
For today, comments by BoE and Fed officials are also likely to focus on the expected recovery and the prospects for further monetary stimulus. In the UK, MPC external member Tenreyro is scheduled to participate in a webinar panel discussion on the policy response, while the Fed’s Bostic is due to hold a ‘virtual discussion’ on Covid-19 and the US economy. Both are expected to reiterate the need for continued joint fiscal and monetary support to aid the recovery from the pandemic.
Early tomorrow morning, the ONS will publish the latest labour market statistics report at 07:00 BST. The release is not very timely, given that it mostly covers the three months to March and is expected to show only a relatively modest slowing in employment and only a limited rise in the unemployment rate. The UK’s Job Retention Scheme should prevent the unemployment rate rising by as much in coming months as it has in the US. Nevertheless, it is likely to go up and April jobless claims data should provide some hints on this as reports suggest that benefit claims have risen by around 2 million since the lockdown started.
In keeping with generally subdued, if somewhat choppy, trading patterns in the spot market, positioning in currency futures, which shed some light on broader speculative sentiment across the major currencies, shows little change in this week’s CFTC data. The overall exposure to the USD, reflected in the aggregated positioning across the major currencies we follow, show a further, if only marginal, reduction in the aggregate short that had accumulated through mid-April. This week’s data shows a USD398mn reduction in the aggregate USD short to USD8.01bn (from the recent peak of USD10.6bn).
Today’s Options Expiries for 10AM New York Cut (notable size in bold)
- EURUSD: 1.0700 (800M), 1.0750 (204M), 1.0800 (670M), 1.0845-50 (450M) 1.0875 (563M), 1.0890 (500M), 1.0900 (1.1BLN)
- GBPUSD: 1.2050 (227M), 1.2200 (300M)
- AUDUSD: 0.6275 (446M), 0.6400 (350M), 0.6480 (305M), 0.6495 (634M)
Technical & Trade Views
EURUSD Bias: Bullish above 1.0750 targeting 1.1050
From a technical and trading perspective, watch for continued reaction at the ascending trendline support towards 1.0750, a failure to defend this area would be a bearish development opening a move to test year to date lows. However if 1.0750 continues to hold look for a test of 1.09 interim equality objective and then onto a descending trendline resistance sighted at 1.0950
GBPUSD Bias: Bearish below 1.2250 targeting 1.20)
GBPUSD From a technical and trading perspective, the momentum trendline failure forewarned of the price decline through 1.23 support, as this level contains upside attempts look for a move to test the pivotal support cluster to 1.20 UPDATE noteworthy demand has picked up for GBPUSD FX options that would allow holders to sell the pound at 1.2000 and below over coming weeks. There’s already been demand for early July downside options as concern grows over the June 30 Brexit deadline
USDJPY Bias: Bearish below 107.50 targeting 1.0465)
USDJPY From a technical and trading perspective, range contraction persists,albeit with a downside bias, a breach of 106.80 should inject downside momentum. A topside breach of 108.50 would delay downside objectives opening a retest of range resistance above 109 before lower again
AUDUSD Bias: Bullish above .6450 targeting .6700)
AUDUSD From a technical and trading perspective, price testing pivotal .6568 prior cycle highs area if sufficient supply is seen here look for another leg lower to test trend support back to .6330 before another attempt to base and make another run towards the .6700 primary upside objective
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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