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by Charalambos Pissouros

Markets Keep Trading Risk Off, Eurozone PMIs Take Center Stage

Risk Aversion continued on Thursday and during the Asian session Friday, as the US initial jobless claims added to concerns over another economic downturn, while tensions between the world’s two largest economies escalated further, with China ordering the US to close its consulate in Chengdu. As for today, the main data set on the agenda may be Eurozone’s PMIs for July. Following the deal over a recovery fund, a decent set of PMIs may add further fuel to the euro-rally.

AUD and NZD Slide, JPY and CHF Gain on More Risk Aversion

The US dollar traded mixed against the other G10 currencies on Thursday and during the Asian morning Friday. It gained against AUD, NZD, NOK, and slightly against CAD, while it underperformed versus JPY, CHF, and EUR. The greenback was found virtually unchanged against GBP and SEK.

USD performance G10 currencies

The strengthening of the safe-havens yen and franc, combined with the weakening of the risk-linked Aussie and Kiwi, suggests that the financial community continued trading in a risk-off fashion. Indeed, although most major EU indices closed virtually unchanged, the US ones tumbled on average 1.6%, with the negative investor morale rolling into the Asia session today. Japanese markets stayed closed, but China’s Shanghai Composite, Hong Kong’s Hang Seng, and South Korea’s KOSPI are down 4.13%, 2.63%, and 1.23%.

Major global stock indices performance

Following Wednesday’s report that the US ordered China to close its consulate in Houston amid accusations of spying, more developments came to add pressure to investors’ appetite. Starting with the data, US initial jobless claims accelerated for the first time in nearly four months, suggesting that the fast spreading of the coronavirus may have been stalling the economic recovery. On top of that, news hit the wires that Apple Inc faces investigations in several states for deceiving consumers, which steepened Wall Street’s slide. Asian shares traded on the back foot as well, with headlines that China ordered the US to close its consulate in Chengdu, adding to the broader negative sentiment.

As for our view, we still believe that there are two forces driving the markets recently. On the one hand, hopes that the global economy will recover faster than previously thought and encouraging headline over a potential virus vaccine are keeping the latest short-term uptrend in equities and risk-linked assets intact. On the other hand, the heightening tensions between the US and China, combined with the acceleration in global infections, are resulting in deep downside corrections, like the one we had the last couple of days. As we noted yesterday, we still see the case for risk-linked assets to rebound again soon and continue trending north, but the big question remains: For how long can the bulls hold onto the driver’s seat? Further escalation in the US-China tensions and a second round of lockdown measures may eventually force more market participants to abandon equities and other risky assets, as they seek shelter in safe havens, like the dollar, the yen and the franc.

AUD/JPY – Technical Outlook

AUD/JPY experienced a sharp reversal to the downside yesterday. The slide may continue for a bit more, but if the pair gets a good hold-up near its short-term upside support line taken from the low of June 12th, the bulls may take advantage of the lower rate and lift it up again. That’s why we will stay positive overall, at least for now.

A drop below the 75.27 or the 75.15 levels, marked by the highs of July 15th and 20th respectively, could force the pair to move towards the aforementioned upside line. If that line continues to provide support, the rate may rebound and make its way up again. A push back above the 75.27 barrier could set the stage for a move to the 75.97 level, marked by the current high of today.

On the other hand, if the upside line breaks and the rate falls below the 74.66 territory, marked by the low of July 16th, that could spook the bulls from the field and allow more bears into the arena. AUD/JPY might travel to the 74.24 obstacle, a break of which may clear the path to the 74.00 mark, which is near the low of July 10th.

AUD/JPY 4-hour chart technical analysis

EZ PMIs to Add to Hopes of Economic Recovery

As for today, investors and traders may pay attention to the preliminary PMIs for July. We start the day with the prints from several Eurozone members and the bloc as a whole. The Euro-area manufacturing index is anticipated to have risen to the equilibrium level of 50.0 from 47.4, while the services one is expected to reveal expansion for the first time since February. Specifically, it is expected to have increased to 51.0 from 48.3. The composite index is forecast to have inched up to 51.1 from 48.5.

Eurozone PMIs

At last week’s gathering, the ECB did not alter its monetary policy, but stayed ready to adjust all its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner. At the press conference following the decision, President Lagarde urged EU governments to take action in battling the coronavirus pandemic as soon as possible, with EU leaders eventually reaching consensus on Tuesday morning. The euro has been on a rally mode this week, on hopes that with a fiscal aid, the Eurozone is now likely to recover faster. Thus, a better than expected set of PMIs could add to those hopes and push the currency even higher, especially against the safe-havens USD and JPY, which could come under some selling interest if the data comes on the bright side.

EUR/USD – Technical Outlook

EUR/USD had a decent rally this week, until it found resistance near the 1.1627 barrier. This morning, the pair is correcting lower, however, let’s not forget that the rate is still above its short-term upside support line taken from the low of July 10th. As long as the pair stays above that upside line, we will remain positive, at least with the near-term outlook.

EUR/USD could drift a bit lower, but if it finds good support near the 21 EMA on the 4-hour chart, or near the above-mentioned upside line, we will stay positive, as the bulls might take advantage of the lower rate. If so, the pair may travel up again towards the current high of this week, at 1.1627, a break of which could open the door the 1.1650 zone, marked by the low of September 19th and the high of September 28th of 2018. EUR/USD might stall there for a bit, however if the buying doesn’t stop there, the next potential resistance area to consider may be the 1.1725 level, which is the inside swing low of September 24th, 2018.

Alternatively, if the previously-discussed upside line breaks and the rate also falls below the 1.1507 hurdle, marked by the low of July 22nd, that may open the door for further declines, as more sellers could join in. The pair might travel to the 1.1468 hurdle, or even the 1.1402 zone, marked by the high and the low of July 20th respectively. EUR/USD may get a temporary hold-up near the last-mentioned obstacle, however if the sellers are still feeling comfortable, they could push the rate further down, where the next possible support area may be at 1.1370, marked by the low of July 16th.

EUR/USD 4-hour chart technical analysis

As for the Rest of Today’s Events

We get preliminary PMIs from the UK as well, but no forecast is currently available. During the early European morning, we already got the nation’s retail sales for June, which came in much better than expected. Thus, combined with this, decent PMIs may diminish expectations with regards to the adoption of negative interest rates by the BoE, especially after last week’s better-than-expected inflation and employment data.

Having said that though, the main driver for the pound is likely to be developments surrounding Brexit. Yesterday, EU chief Brexit negotiator Michel Barnier said that the UK has shown no willingness to break the deadlock of talks over a new trade agreement. With just days to go until UK PM Johnson’s deadline for an outline deal, this increases the chances of a no-deal Brexit on December 31st, when the transition period ends. Thus, despite the latest recovery in Cable, we don’t expect the pound to perform well. One reason behind the advance in GBP/USD may have been the weakness in the dollar. We prefer to exploit any potential weakness in the pound against the euro, which we expect to stay supported, especially if today’s PMIs surprise to the upside.

More PMIs are coming out later in the day, this time from the US. The manufacturing index is expected to have risen to 51.5 from 49.8, while the services one is anticipated to have increased to 51.0 from 47.9. New home sales for June are also due to be released, with the forecast suggesting a slowdown to +4.4% mom from +16.6%.

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