Risk appetite remained subdued yesterday as global infections from the coronavirus hit a new daily record, and after reports saying that the Trump administration is considering banning travel to the US by all members of the Chinese Communist Party and their families. The ECB stood pat yesterday, with President Lagarde urging EU leaders to agree on a rescue plan at the EU summit scheduled for today and tomorrow.
The dollar traded mixed against the other G10 currencies on Thursday and during the Asian morning Friday. It gained versus CAD, JPY, NZD, and EUR in that order, while it underperformed against NOK, SEK, GBP and CHF. The greenback was found virtually unchanged versus AUD.
Once again, the performance in the FX sphere paints a blurry picture with regards to the broader market sentiment and thus, we will turn our gaze to the equity world. There, major EU and US indices traded in negative territory, with the only exception being Italy’s FTSE MIB, which gained 0.37%. Things improved somewhat during the Asian session today. Although Japan’s Nikkei 225 slid 0.39%, China’s Shanghai Composite and Hong Kong’s Hang Seng gained 0.15% and 0.52% respectively.
It seems that the acceleration in global infected cases from the coronavirus, as well as the new US-China tensions continued to weigh on the broader investor morale during the EU and US sessions. Yesterday, Covid infections hit a new daily record, while on top of the recent headlines with regards to the US imposing visa restrictions on Chinese firms and addressing security risks posed by Chinese mobile apps, fresh reports suggested that the Trump administration is also considering banning travel to the US by all members of the Chinese Communist Party and their families. The fact that initial jobless claims came in close to their prior print, failing to slow further down as the forecast suggested, may have also been a negative for investors’ appetite.
As for our view, it has not changed yet. We prefer to stay sidelined and wait for clearer signals with regards to the broader market sentiment. As we noted yesterday, on the one hand, we have news pointing to a positive vaccine trials, which are very positive for the markets, as with a vaccine ready, governments may not need to proceed with new full-scale lockdowns, and thereby, allow their economies to continue recovering. On the other hand though, infected cases by the virus are still on acceleration mode, while tensions between the world’s two largest economies remain elevated, something that could jeopardize any progress made so far with regards to a trade accord.
Yesterday, we also had an ECB monetary policy decision, with the Bank keeping interest rates and all its stimulative programs unchanged as was widely anticipated. The statement was also largely untouched compared to the previous one, with officials reiterating their readiness to adjust all of their instruments as appropriate, to ensure that inflation moves towards their aim in a sustained manner. As we have been expecting, at the press conference following the decision, President Lagarde urged EU governments to take action in battling the pandemic as soon as possible. “It is important for European leaders to quickly agree on an ambitious package,” she noted.
The euro barely reacted to the event, perhaps as its traders preferred to place more emphasis to the special EU summit scheduled for today and tomorrow, where leaders are expected to discuss again the EUR 750bn rescue fund. If they manage to find common ground, the euro as well as the broader risk appetite are likely to receive support. The opposite may be true if they once again fail to seal a deal.
The Euro Stoxx 50 index continues to slowly grind higher towards the June high, at 3398, while balancing above a short-term tentative upside support line taken from the low of June 15th. Although the index seems to be struggling with the 3398 barrier, it continues to form higher lows, which gives hope for some buyers. For now, we will take a cautiously-bullish approach and wait for a confirmation break above that 3398 zone, before getting a bit more comfortable with higher areas.
If, eventually, the price does climb and stay above the aforementioned 3398 zone, that may clear up the way to some higher areas, as such a move would confirm a forthcoming higher high, what could interest more buyers. The index might then rise to the 3468 obstacle, a break of which may set the stage for a further move north, where the next possible resistance area might be at 3597. That area is marked by the high of February 26th.
On the downside, if the previously-discussed upside line gets broken and the price slides below the 3275 area, marked by the low of July 14th, that may open the door to some lower levels. More bears might see it as a good opportunity to join in and drive the index towards the 3233 obstacle, or even the 3179 zone, which is the current lowest point of July. The Euro Stoxx 50 could stall there temporarily, but if the sellers are still feeling comfortable, a break of that 3179 zone may clear the way to 3146 level, marked by the low of June 25th.
Overall, EUR/GBP continues to balance above a short-term upside support line drawn from the low of April 30th. At the same time, the pair is trading below a short-term downside line taken from the high of July 14th. It looks like the rate is coiling up, which forces us to remain cautious and wait for a violation of one of those lines first, before examining the next short-term directional move.
If EUR/GBP breaks the aforementioned downside line and pushes above the 0.9055 barrier, marked by yesterday’s high, that could clear the way to some higher areas. Such a move could be seen as a continuation of the prevailing trend and more buyers could join in the action. EUR/GBP might then drift to the current highest point of this week, at 0.9112, a break of which may set the stage for a rise to the 0.9144 level, marked by the high of June 30th.
On the other hand, if the rate goes ahead and breaks the previously-discussed upside line and also falls below the 0.9044 hurdle, which is the low of July 15th, that could increase the pair’s chances of moving further south. EUR/GBP may then travel to the 0.9010 obstacle, a break of which could open the door for a move to the 0.8969 level, marked by the inside swing high of July 10th.
During the European morning, we have Eurozone’s final CPIs for June, but as it is always the case, they are expected to confirm their preliminary prints.
Later, the US building permits and housing starts for June, as well as the preliminary UoM consumer sentiment index for July are coming out. Both building permits and housing starts are expected to have increased somewhat, while the UoM index is anticipated to have risen to 79.0 from 78.1.
As for the speakers, we have three on today’s schedule: BoE Governor Andrew Bailey, ECB Vice President Luis de Guindos, and ECB Executive Board member Isabel Schnabel.
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