Risk appetite softened yesterday, perhaps due to a report questioning the results of the coronavirus tests by Moderna Inc. As for the data, today, we already got the UK CPIs for April, which missed their forecasts. We get more inflation data later in the day, this time from Canada. From the US, we have the minutes from the latest FOMC gathering.
The dollar traded lower against all but one of the other G10 currencies on Tuesday and during the Asian morning Wednesday. It gained only against JPY, while the currencies against which it lost the most ground were NZD, NOK, and GBP in that order. The greenback underperformed the least versus CAD and CHF.
The weakness of the dollar and the traditional safe havens yen and franc suggests that risk appetite remained supported for another day. However, turning our gaze to the equity world, we see that this was not the case. Major EU and US indices closed in the red – the only exception was DAX –, with sentiment improving somewhat during the Asian session. Although China’s Shanghai Composite and Hong Kong’s Hang Seng are down 0.38% and 0.15%, Japan’s Nikkei gained 0.81%, while South Korea’s KOSPI is up 0.32%.
The setback in investor morale may have been the result of a report questioning the results of the coronavirus tests by Moderna Inc. In the report, it was noted that the test results were lacking details. What’s more, both infected cases and deaths from the disease accelerated yesterday, which may have also dented market sentiment. However, with headlines suggesting that more fiscal and monetary stimulus around the globe is underway and with the virus curve being much flatter than a couple of months ago (despite yesterday’s acceleration), we would treat yesterday’s setback as a corrective move. Even if we had a report questioning the vaccine results, we believe that we are much closer to a successful drug than before. Thus, we stick to our guns that the path of least resistance for risky assets may be to the upside, with safe havens set to lose more of their shine.
As for today, we already got the UK CPIs for April. The headline rate tumbled to +0.8% yoy from +1.5%, missing estimates of +0.9% yoy, while the core rate slid to +1.4% yoy from +1.6%. The forecast was for the core rate to tick down to +1.5% yoy. The fact that the core rate declined by less than the headline one, suggests that this may have been due to the collapse in oil prices during the month.
However, this data is unlikely to change speculation over the BoE’s monetary policy plans. At its latest meeting, the Bank kept its policy unchanged, but noted that the current QE is set to reach its target at the beginning of July. This, combined with officials’ readiness to take further action if needed, suggests that a QE expansion may be on the cards at the June meeting.
As for the pound, we stick to our guns that the stalemate of the Brexit negotiations, combined with the prospect of further easing and the likelihood of negative rates in the UK, are likely to weigh on the currency. Remember that UK PM Johnson insists that the Brexit transition period should last until December 31st, which keeps a no-deal exit on the table, while on Friday, BoE’s Chief Economist Andy Haldane said that the Bank is looking more urgently at negative interest rates.
We get more inflation data for April later in the day, this time from Canada. The headline CPI rate is expected to have fallen into the negative territory, to -0.1% yoy from +0.9%, while no forecast is available for the core rate. As was the case with the UK CPIs, due to the collapse in oil prices, we expect the Canadian core rate to have slid by less than the headline rate.
At its prior gathering, the BoC announced an expansion of its QE purchases, and a potential negative inflation rate, combined with further slide below the Bank’s objective of 2% in the core metric, may increase speculation for more easing by this Bank and thereby bring the Canadian dollar under selling interest. That said, we would treat such a setback as a corrective move. If risk appetite improves again, oil prices are likely to benefit, which in turn could provide support for the Canadian currency.
Although EUR/GBP declined yesterday, it is still balancing slightly above a short-term upside support line taken from the low of May 11th. It seems that the bulls are desperately trying to keep the pair afloat, but in order to get a bit more comfortable with higher levels, we would like to see a break above the current highest point of May, at 0.8960. Until then, we will stay cautiously bullish.
A push above the 0.8960 barrier, would confirm a forthcoming higher high and this may open the door for a further acceleration. EUR/GBP could then travel to the 0.8995 territory, marked by the low of March 20th, which may halt the uprise temporarily. If so, the rate might even correct a bit lower, however, if it remains above the aforementioned upside line, the bulls may jump in and help lift EUR/GBP up again. If this time the 0.8995 hurdle breaks, the next possible target might be near the 0.9055 level, marked by the inside swing low of March 25th.
If the pair breaks the aforementioned upside line and falls below the 0.8894 hurdle, which is the low of May 18th, this might temporarily spook the bulls from the field. Such a move may increase the rate’s chances of sliding further, where the next target could be at 0.8807, marked by the high of May 11th and the low of May 13th. Around there, EUR/GBP might get a hold-up initially, as it would also test the 200 EMA on the 4-hour chart, which could provide a bit of support. That said, if the bears are still feeling slightly more comfortable, a break of that area may send the rate to the 0.8758 zone, marked by the low of May 12th.
After peaking in mid-March, USD/CAD continues to form lower highs, however it seems to be struggling to move below the 1.3855 hurdle, which keeps on providing decent support. Given such an activity, the pair is forming somewhat of a descending triangle, which tends to break lower, according to the TA rules. That said, before we could get comfortable with examining lower areas, we would like to see a break of the 1.3855 level first, hence why we will take a cautiously-bearish stance for now.
If the rate eventually falls and stays below the 1.3855 hurdle, which marks the lows of April 13th and 30th, this would confirm a forthcoming lower low and more sellers could jump in. USD/CAD might then drift to the 1.3729 zone, a break of which could set the stage for a deeper slide. We will then target the 1.3610 area, marked by the low of March 10th, which may provide some initial support.
Alternatively, to shift our attention to some higher levels, at least in the near term, we would prefer to wait for a violation of the upper side of the triangle first. In addition to that, a push above the high of last week, at 1.4140, might invite more buyers. If so, the pair may end up drifting higher, possibly testing the current highest point of May, at 1.4173, a break of which could send the rate to the 1.4265 zone, marked by the high of April 21st. If that area manages to provide initial resistance, the pair might retrace slightly lower. That said, if USD/CAD stays above the upper side of the triangle, the bulls could try and take advantage of the lower rate and push it up again. If this time the 1.4265 barrier breaks, the next possible resistance level to consider could be the 1.4349 level, marked by the high of March 31st.
Ahead of the Canadian CPIs, we get Eurozone’s final CPIs for April, but as it is always the case, they are expected to confirm their initial estimates.
Later, in the US, we have the minutes of the latest FOMC gathering. Back then, the Committee kept interest rates unchanged at the 0-0.25% range and hinted that more stimulus may be delivered if judged necessary. “We will continue to use powers proactively until we’re confident that the US is solidly on the road to recovery”, Fed Chair Powell noted. He also added that economic activity will likely drop at an “unprecedented pace” in Q2, which suggests that they are more likely to act again than not.
We will look into the minutes for clues of how likely further action is, and what form it could take, but we don’t expect them to prove a major market mover this time around. After all, we got an updated view on monetary policy by several Fed officials recently, including Fed Chair Powell, who warned over an “extended period” of weak growth and stagnant incomes due to the pandemic, but who also made it clear that he and his colleagues are unlikely to push interest rates below zero. Remember that a couple of weeks ago, investors have started to price in such a likelihood by pushing the yields of the Fed funds futures into the negative territory. Today though, all yields are back in the positive zone.
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