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by Charalambos Pissouros

Risk Off Intensifies, GBP to Stay Linked to Brexit

Risk off intensified yesterday as investors may have continued locking profits following the recent steep recovery in equities. Post the FOMC decision, they may have also turned their attention back to the coronavirus numbers, with the new daily infected cases hitting a new record yesterday. As for today, we already got the UK’s monthly GDP for April, but the pound stayed unfazed. We believe that the currency’s faith may depend mostly on developments and headlines surrounding Brexit.

Investors Stay Nervous as Coronavirus Fears Resurface

The US dollar continued trading higher against all but one of the other G10 currencies on Thursday and during the Asian morning Friday. It rose the most versus NOK, AUD, CAD, and NZD in that order, while it eked out the least gains against JPY. The greenback was found virtually unchanged versus CHF.

USD performance G10 currencies

Once again, the performance in the FX sphere suggests that investors continued trading in a risk-off fashion. Indeed, taking a look at the equity world, we see that major EU and US indices tumbled on average around 5%, with the negative morale, although softer, rolling into the Asian session today. Although China’s Shanghai Composite was nearly unchanged, Japan’s Nikkei 225, Hong Kong’s Hang Seng, and South Korea’s KOSPI slid 0.80%, 1.10%, and 2.06% respectively.

Major global stock indices performance

It appears that post the FOMC decision, investors continued reducing their risk exposures, perhaps locking more profits following the recent steep recovery in equities and risk-linked currencies since the end of March. Another reason behind yesterday’s slide may have been that participants focused again on the coronavirus numbers, with the number of daily infected cases hitting a new record yesterday. However, our own view is that this may be partly owed to more testing.

Daily change in coronavirus cases and deaths

In any case, as long as governments around the globe continue to ease their lockdown measures, and as long as economic data continues to point that the deep economic wounds due to the coronavirus are behind us, we would treat the current retreat as a corrective phase of the broader recovery. We still see decent chances for equities and other risk-linked assets to rebound again, and for safe havens to come under renewed selling interest. We would reconsider that view in case nations start imposing a fresh round of restrictions, which may be a new blow to the global economy.

DAX – Technical Outlook

The German DAX took a strong nosedive yesterday, closing in the red for the third day in a row. Although it looks worrying, the index is still balancing above its short-term tentative upside support line taken from the low of March 19th, which could help keep the bulls active. The price could fall a bit lower, but if that upside line remains intact, another round of buying might be possible.

If so, the German index might climb back above the 11835 obstacle and aim for the 12279 zone, which is the highest point of March. If the buying doesn’t stop there, the price may easily get pushed back to this week’s high, at 12929.

On the other hand, if the index breaks the aforementioned upside line and the price falls below the 11340 hurdle, marked by the highest point of April, that may totally spook the bears from the field. DAX could then travel to the 10865 obstacle, a break of which may set the stage for a slide towards the 10373 and 10169 levels, marked by the lows of May 15th and 14th respectively.

German DAX cash index daily chart technical analysis

GBP to Stay Anchored to Brexit Headlines

Back to the currencies, the British pound was also lower against its US counterpart. Today, we already got the UK’s monthly GDP, industrial production, and the nation’s trade balance, all for April. Economic activity tumbled 20.4% mom after sliding 5.8%, with the forecast being at -18.7%. This drove the yoy rate down to -24.5% from -5.7%. Industrial production also accelerated its decline, to -20.3% mom from -4.2%, while the nation’s trade deficit narrowed to GBP 7.49bn from 11.85bn.

UK monthly GDP

The collapse in economic activity during April may have increased the chances for the introduction of negative interest rates by the BoE, but the pound did not react. It seems that the currency stays more linked to developments and headlines surrounding Brexit. On Friday, EU and UK negotiators said that they have made very little progress in their latest round of talks, and with just a few days left for the UK to ask for an extension to the transition period, headlines on that front may carry extra weight as we get closer to the June 18th and 19th EU summit. UK PM Johnson has been insisting on a December 31st deadline for finding common ground, while EU Chief negotiator Barnier noted that a deal needs to be sealed by the end of October to allow enough time for ratification by the bloc’s 27 member states. The UK’s position for no extension beyond December was reaffirmed yesterday by Cabinet Office Minister Michael Gove, who said that the UK will not seek an extension of the transition period.

With all that in mind, anything pointing to further disagreement could strengthen the case for a no-deal Brexit at the end of this year and may add pressure to the British pound. That said, we prefer to exploit any further pound losses against risk-linked currencies, like the Aussie and the Kiwi. Yes, both may continue to trade on the back foot if investors continue to reduce their risk exposure for a while more, but if indeed risk appetite rebounds again at some point, we expect those two currencies to perform pretty well.

GBP/NZD – Technical Outlook

After rebounding from around the 1.9370 area in the beginning of this week, GBP/NZD started slowly grinding higher. Although the pair is showing willingness to move a bit further north, the upside might get limited near its short-term tentative downside resistance line taken from the high of May 15th. If that downside line remains intact, we will class this week’s upmove, as temporary correction and GBP/NZD could once again come under some selling interest. For now, we will take a cautiously-bearish approach.

A small push higher might test the aforementioned downside line, which if stays intact, could attract the sellers back into the game. If so, GBP/NZD may travel back below the 1.9565 hurdle, a break of which might clear the way for a move towards the low of June 10th, at 1.9448. Slightly below it lies another possible support area, which may get tested, and that the low of this week, at 1.9370.

Alternatively, if the previously-discussed upside line breaks and the rate climbs above the 1.9727 barrier, marked by the high of June 3rd, that may temporarily spook the bears from the field and allow more bulls to join in. The rate might accelerate sharply and overcome the 1.9760 obstacle, or even the 1.9820 hurdle, marked by the low of June 1st. A further push north could test the 1.9930 zone, which is the high of June 1st. GBP/NZD may get a hold-up around there, as it might also test the 200-day EMA, however, if the bulls stay confident, they may lift the pair again, where the next possible target could be near the high of June 2nd, at the psychological 2.0000 level.

As for the Rest of Today’s Events

Eurozone’s industrial production for April is coming out and expectations are for a 20.0% mom tumble after a slide of 11.3%, while from the US, we get the preliminary UoM (University of Michigan) consumer sentiment index for June. This index is expected to increase to 75.0 from 72.3.

As for the speakers, we have two on today’s agenda: ECB Supervisory Board Chief Andrea Enria and Richmond Fed President Thomas Barkin.


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