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by Charalambos Pissouros

Markets Switch to “Risk Off”, GBP the Main G10 Winner

Equities slid, while the US dollar gained yesterday and during the Asian morning today, with headlines and developments raising again concerns over a second wave of fast-spreading coronavirus infections around the globe. Among the G10 currencies, the pound was the main gainer, bought after UK PM Boris Johnson said that he is willing to reach an early trade deal with the EU.

Equities Slide, USD Gains as Virus Concerns Return

The dollar traded higher against the majority of the other G10 currencies on Tuesday and during the Asian morning Wednesday. It gained the most versus NOK, AUD, CAD and EUR in that order, while it underperformed only against GBP. The greenback was found virtually unchanged against CHF and SEK.

USD performance G10 currencies

The strengthening of the dollar and the franc, combined with the weakness in the Aussie, suggests that trading switched to risk off. Indeed, turning our gaze to the equity world, we see that major EU and US indices were a sea of red. That said, things improved again somewhat during the Asian session today. Although Japan’s Nikkei 225 slid 0.75%, China’s Shanghai Composite gained another 1.40%.

Major global stock indices performance

The catalyst behind the switch to risk off appears to have been a blend of developments rather than just a single event. The first hit came after the Australian state of Victoria announced a renewed six-week lockdown in Melbourne, the nation’s second largest city. Then, the EU Commission announced that it is now seeing a deeper slump than previously anticipated in this year’s economic activity. Later in the day, with several US states announcing new daily records of infections from the coronavirus, Atlanta Fed President Raphael Bostic said that the crisis may go on longer than previously thought and perhaps outlast current relief programs, while Cleveland Fed President Loretta Mester noted that a resurgence in coronavirus cases is making consumers more cautious, and thus, more fiscal stimulus may be needed to help the economy recover fully.

Coronavirus daily change in cases and deaths

With global infections and deaths from the coronavirus accelerating again, it’s not strange why the aforementioned developments weighed on the broader market sentiment. It seems that following a decent winning streak, some investors may have taken the opportunity to lock some profits. That said, until we see more lockdown measures being reintroduced around the world, we would treat yesterday’s slide as a corrective retreat. If data continues to suggest that the global economy is recovering faster than previously anticipated, we will see decent chances for equities and other risk-linked assets to rebound again.

S&P 500 – Technical Outlook

We can see that yesterday, the S&P 500 index failed to move to its June high, at 3232, and reversed back down. This could be a sign that the index might not be ready to go further north yet and may be aiming for a small correction first. We can now draw a short-term tentative downside line, taken from the high of June 9th, which we will monitor carefully. But at the same time, we will not forget about a short-term tentative upside support line drawn from the low of June 15th. This technical picture shows that the price could be coiling up, as it is stuck between the two lines, which is why we will take a neutral stance for now.

If the S&P 500 breaks the aforementioned downside line and also pushes above the June high, at 3232, that may invite more buyers into the game, as such a move would confirm a forthcoming higher high. The index may then travel to the 3305 obstacle, a break of which could set the stage for a rise to the all-time high, near the 3397 level, reached on February 20th.

Alternatively, if the previously-mentioned upside line fails to provide support and breaks, that may caution the bulls. Some of them might start abandoning the field if the price slides below the 3038 zone, marked by the lows of June 21st and 30th. The S&P 500 may then drift to the 2995 obstacle, or even the 2936 area, marked by the lowest point of June, where the index might get a hold-up. It could rebound somewhat, however, if the price struggles to get back above the 3000 territory, another drop might be possible. If this time the 2936 hurdle is not able to provide support, a break of it would confirm a forthcoming lower low and we may see the S&P 500 moving towards its next possible support level, at 2882, marked by the inside swing high of May 13th.

S&P 500 daily chart technical analysis

GBP Gains on PM Johnson’s Remarks

Now, back to the currencies, the pound was the main gainer, and this may have been due to headlines that UK PM Boris Johnson is willing to reach an early trade deal with the EU. With a new round of talks starting this week, his comments were cheered by GBP-bulls, who sent Cable to a new monthly high. What’s more, Chancellor Rishi Sunak is due to unveil more spending measures today, which may have also been a positive for the pound.

GBP performance G10 currencies

Having said that though, later in the day, PM Johnson provided a reality check to investors, saying that, although he remains committed in finding an early agreement, the UK is still ready to exit without a trade deal. In our view, the forthcoming direction in the pound will depend on how this round of talks undergoes. If indeed there are signs of progress, the currency is likely to extend its recent gains. However, anything pointing to another deadlock could come as a big disappointment, as it would leave well on the table the option of a no-deal Brexit. If no progress is made, the pound is likely to come under selling interest, and conditional upon an upcoming rebound in investors’ morale, it may lose the most ground against risk-linked currencies, like the Aussie, the Kiwi and the Canadian dollar.

GBP/CAD – Technical Outlook

After finding support near the 1.6750 hurdle in the end of June, GBP/CAD started forming higher highs and higher lows. The pair is now balancing above a short-term tentative upside support line taken from the low of July 1st. Although the rate may continue moving higher for a bit more, let’s not forget that overall, GBP/CAD is still trading below a medium-term tentative downside resistance line drawn from the high of March 9th. For now, we will aim a bit higher, but the upside might get halted near that downside line.

If the rate rises above yesterday’s high, at 1.7103, that would confirm a forthcoming higher high and more buyers could join in the action and help the pair move to the 1.7175 hurdle, which is marked near the highest point of June. GBP/CAD might stall there temporarily, or even correct a bit lower, however, if the rate continues to float above the 1.7100 zone, the bulls could remain interested. If so, another push higher and this time a break of the 1.7175 obstacle may set the stage for a drift to the 1.7238 level, marked by the high of May 14th. Slightly above it runs the aforementioned downside line, which could provide additional resistance.

On the other hand, if the previously-mentioned upside line breaks and the rate falls below the 1.6958 hurdle, marked by the high of June 6th, that may spook the bulls from the field, allowing more bears to join in. GBP/CAD might then travel to the 1.6875 obstacle, a break of which could open the way to the 1.6769 area, or the 1.6750 level, marked by the lows of June 30th and 19th respectively.

GBP/CAD 4-hour chart technical analysis

As for Today’s Events

The calendar appears relatively light with the only data worth mentioning being Canada’s housing starts for June and the EIA (Energy Information Administration) weekly report on crude oil inventories. Canada’s housing starts are expected to have accelerated to 198k from 193.5k, while the EIA report is forecast to reveal a 3.114mn barrels slide after a 7.195 slump. That said, with the API report yesterday pointing to a 2mn barrels increase, we would consider the risks of the EIA forecast as tilted to the upside.

As for tonight, during the Asian morning Thursday, we have China’s CPI and PPI for June. The CPI rate is expected to have ticked up to +2.5% yoy from +2.4%, while the PPI rate is anticipated to have risen to -3.2% yoy from -3.7%.

As for the speakers, we have one on today’s agenda and this is ECB Vice President Luis de Guindos.

Disclaimer:

The content we produce does not constitute investment advice or investment recommendation (should not be considered as such) and does not in any way constitute an invitation to acquire any financial instrument or product. The Group of Companies of JFD, its affiliates, agents, directors, officers or employees are not liable for any damages that may be caused by individual comments or statements by JFD analysts and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his investment decisions. Accordingly, you should seek, if you consider appropriate, relevant independent professional advice on the investment considered. The analyses and comments presented do not include any consideration of your personal investment objectives, financial circumstances or needs. The content has not been prepared in accordance with the legal requirements for financial analyses and must therefore be viewed by the reader as marketing information. JFD prohibits the duplication or publication without explicit approval.

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