The euro was among the main gainers on Wednesday and during the Asian morning Thursday, as the EU Commission announced a EUR 750bn plan to support the Union’s economies hurt by the coronavirus crisis. The pound was the second loser in line, coming under selling interest on more headlines pointing to a Brexit impasse, as well as on fresh talks about negative interest rates by the BoE.
The US dollar traded higher against the majority of the other G10 currencies. It gained versus AUD, GBP, NZD, JPY and CHF in that order, while it underperformed against SEK, EUR and NOK. The greenback was found virtually unchanged against CAD.
The relative strength of the dollar and the weakening of the Aussie suggest that risk appetite softened at some point yesterday. That said, the fact that the yen and the franc stayed slightly on the back foot, combined with a relatively strong Loonie, points otherwise. Thus, in order to clear things up, we prefer to take a look at how the global equity indices have performed. Major EU bourses traded in the green as the EU Commission announced a EUR 750bn plan to support the Union’s economies hurt by the coronavirus crisis, with the upbeat morale rolling into the US session. However, investors reduced their risk exposure during the Asian session today, after US Secretary of State Mike Pompeo said Hong Kong no longer warrants special treatment under US law. Although Japan’s Nikkei gained 2.31%, China’s Shanghai Composite index and Hong Kong’s Hang Seng are down 0.21% and 1.15% respectively.
So, what does Pompeo’s statement actually mean? This means treating Hong Kong the same as mainland China for trade and other purposes, and could hurt mainland China, which uses Hong Kong as a middle ground for transactions with the rest of the world. The move may prompt China to respond and could jeopardize even further the already fragile relationship between the world’s two largest economies. In terms of market reaction, more tensions between the US and China are likely to result in another round of selling in equities and risk-linked assets, but we repeat that for now, it seems that investors prefer to place more bets on a global economic recovery as governments around the globe continue to ease their lockdown measures. Thus, we would consider any setbacks due to headlines surrounding the US-China saga as corrections in the broader recovery.
Back to the currencies, apart from the EU shares, the euro was also benefited by the European Commission’s announcement over a EUR 750bn rescue plan. Under the proposal, the Commission would borrow funds from the market and then allocate 500bn in grands and 250bn in loans. Much of the money will be distributed to Italy and Spain, which are the members affected the most by the coronavirus spreading.
The positive reaction in shares and the euro may have been due to the fact that the size of the program was bigger than the earlier proposal by France and Germany, which faced opposition by some member states. A Franco-German proposal for EUR 500bn in grants was opposed by Austria, Sweden, Denmark and the Netherlands, which wanted only loans. That said, although signs of more support for European members and further loosening in the virus-related restrictions could be a positive for European stocks and perhaps for the euro as well, focus now may shift to tomorrow’s preliminary Eurozone inflation data for May. Further slowdown in Eurozone’s inflation, or perhaps a deflationary print, may increase the need for additional easing measures by the ECB, and thereby result in a corrective move in EUR pairs.
Yesterday, EUR/GBP bounced off from its sort-term tentative upside support line taken from the low of May 11th. The pair got close to the current highest point of May, near the 0.9000 barrier, but eventually failed to test it. That said, given that the rate is still very close to that barrier today, the bulls may attempt to break it. But until that happens, we will take a cautiously-bullish approach.
Eventually, if we do get a break of the psychological 0.9000 zone, such a move would confirm a forthcoming higher high and more buyers could join in. EUR/GBP could then get pushed to the 0.9070 hurdle, which is near an intraday swing high of March 27th. The rate may get a temporary hold-up around there, but if the buyers are still feeling strong, a further uprise could set the stage for a test of the 0.9133 level, marked by an intraday swing low of March 25th.
In order to shift our attention to some lower areas, we would wait for a violation of the aforementioned upside line and a rate-drop below the 0.8909 hurdle, marked by an intraday swing high of May 26th. If such a move occurs, the next potential support area to consider might be at 0.8880, which is the current low of this week. EUR/GBP could initially rebound slightly, if that area provides decent support. That said, if the pair struggles to get back above the previously-discussed upside line, this might result in another round of selling, which may break the 0.8880 zone this time and confirm a forthcoming lower low. The next possible support levels to aim for could be at 0.8825 and 0.8807, marked by the lows of May 14th and 13th respectively.
Passing the ball to the pound, the British currency was the second loser in line after the UK told the EU that they need to break an impasse in negotiations in order to get closer to a Brexit trade deal by the end of the year, and that an agreement on fisheries may not be ready by July. On top of that, the UK Chief Brexit negotiator David Frost reiterated the UK’s position that the transition period should not be extended beyond December. Further comments on negative interest rates in the UK by the BoE Governor may have also weighed on the pound. Governor Bailey said that the Bank is willing to do more in order to combat the virus fallout and that it’s the right time for them to consider cutting rates. Just for the record, the BoE’s benchmark interest rate now stands at 0.10%.
Given that the BoE has never talked about negative interest rates in the past, such talks, combined with the stalemate in Brexit negotiations, may keep the pound under selling interest. For now, the default outcome in the Brexit saga remains a no-deal exit, an uncertainty that comes on top of the economic damages caused by the spreading of the coronavirus. In our view, with investors staying optimistic regardless fresh tensions between the US and China, it may be better to exploit any potential GBP weakness against the commodity-linked currencies, which tend to benefit during periods of market euphoria, like the Aussie, the Kiwi and the Loonie.
GBP/CAD broke below its key support area, at 1.6970, which kept holding the rate from sliding further since it first tested that area on May 21st. The pair took a beating and ended up testing the 1.6845 zone, which currently continues to provide decent support. The rate may easily go for a small rebound soon, however, let’s not forget that the pair remains below a short-term tentative downside resistance line taken from the high of May 1st and any advance closer to that line, may be seen as a temporary correction before another leg of selling, especially if that line stays intact.
If the rate rises above the 1.6896 hurdle, which is an intraday swing low and high of yesterday, the pair may push a bit higher for a larger correction. That said, if the previously discussed 1.6970 level acts as a good resistance this time, or if the aforementioned downside line remains intact, that could result in another round of selling. GBP/CAD might slide all the way back to the 1.6845 hurdle, a break of which may clear the way to the 1.6755 zone, marked by the low of March 26th.
On the other hand, a break of the above-mentioned downside line could make the bulls worry. They may temporarily abandon the field if the rate rises above the 1.7122 barrier, marked by the high of May 22nd. GBP/CAD could then travel to the 1.7194 obstacle, or even the 1.7260 area, marked by the high of May 14th. The pair might get halted there for a bit, but if the buying-interest is still strong, a break of that area could set the stage for a move to the 1.7362 zone, which is the high of May 8th.
During the European morning, Germany’s preliminary CPIs for May are coming out. Expectations are for both the CPI and HICP yoy rates to have declined to +0.6% and +0.5% from +0.9% and +0.8% respectively. Something like that could raise speculation that inflation in the Eurozone as a whole, the rates of which are expected to be released on Friday, may also slow further.
From the US, we get the 2nd estimate of GDP for Q1, and durable goods orders for April. The second estimate of GDP is expected to confirm the preliminary estimate and show that the US economy contracted 4.8% qoq SAAR. Even if we get a small revision, we expect this release to pass unnoticed as we already have models suggesting how the economy has been performing during Q2. The Atlanta Fed GDPNow model suggests that in the second quarter, the economy slumped 41.9%, while the New York Nowcast points to a -31.1% rate. With the Fed signaling readiness to act further in order to revive economic growth, such rates suggest that the Committee is more likely to ease further its policy than not. Remember that recently, although he expressed opposition to negative interest rates, Fed Chair Powell warned over an “extended period” of weak growth, while at the press conference after the latest FOMC meeting, he said that economic activity will likely drop at an “unprecedented pace” in Q2.
As for the durable goods orders for April, the headline rate is expected to have rebounded somewhat, but to have remained within the negative territory. Specifically, it is expected to have risen to -15.0% mom from -15.3%. That said, core orders are expected to have fallen at a much faster pace than in March (-9.2% from -0.6%). Pending home sales for April and initial jobless claims for last week are also coming out. Pending home sales are forecast to have fallen 15.0% after a 20.8% tumble in March, while initial claims are expected to have surged another 2.1mn.
Tonight, during the Asian morning Friday, we have the usual end-of-month data dump from Japan. The unemployment rate for April is forecast to have risen to 2.7% from 2.5%, while the jobs-to-applications ratio is expected to have fallen to 1.33 from 1.39. The slide in industrial production is anticipated to have accelerated to -5.1% mom during the month, from -3.7%, while the yoy rate of retail sales is forecast to have dropped to -11.5% from -4.7%. We also get the Tokyo CPIs for May. No forecast is currently available for the headline rate, but the core one is anticipated to have ticked down to -0.2% yoy from -0.1%.
We also have one speaker on today’s agenda, and this is New York Fed President John Williams.
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