Major EU indices traded negative yesterday, perhaps still feeling the heat of Fed Chair Powell’s remarks over an “extended period” of weak growth. That said, risk appetite rebounded during the US session, with no clear catalyst behind the change. As for today, the highlight may be the US retail sales for April, which are expected to have fallen at a faster pace than in March.
The dollar traded lower or unchanged against the other G10 currencies on Thursday and during the Asian morning Friday. It gained only against JPY, while it underperformed versus NOK, CAD, AUD, SEK and slightly against NZD. The greenback was found virtually unchanged against EUR, GBP and CHF.
The weakening of the yen and the strengthening of the Aussie suggest a risk-on trading environment. Although major EU indices were a sea of red yesterday, the US ones traded in green waters, with the rebound in investors’ morale rolling somewhat into the Asian session today. Japan’s Nikkei 225 and China’s Shanghai Composite gained 0.53% and 0.17% respectively.
Although there was no clear catalyst behind the improvement in risk appetite, it seems that lately there is a battle between those who are afraid that easing the restrictions too soon will result in another wave of exponential spreading of the coronavirus, and those who believe that the peak is behind us and that economies around the globe have entered the road to recovery. During the EU session, the first group had the upper hand, with the driver perhaps still being Fed Chair Powell’s remarks over an “extended period” of weak growth and stagnant income, as well as comments by US President Donald Trump, who blamed China over the coronavirus outbreak and said that the pandemic is casting clouds over the future of a trade deal between the world’s two largest economies. Later in the day, it seems that the second group saw the slide as a good opportunity to jump in, pushing US equities higher, despite another jump in initial jobless claims for last week.
As for today, investors may turn their attention to the US retail sales for April. Expectations are for headline sales to have tumbled 12.0% mom, after sliding 8.4% in March, while the core rate is forecast to have declined to -8.6% mom from -4.2%. A soft report would mean that demand softened even further during April, with consumers still refraining from spending, and more importantly, it may be a sign that the US economy entered the second quarter of the year on a weaker footing than it ended the first quarter. Thus, this may serve another round of risk aversion, perhaps pushing equities back down and safe havens back up.
The S&P 500 continues to trade within a short-term range, roughly between the 2727 and 2973 levels. In the beginning of this week, the index tried to come close to the upper bound of that range, but failed to test it and retraced slightly lower inside the range. If we look at the cash index, we can see that now the price is balancing near the mid-point of the above-mentioned range. For now, we will take a neutral stance and wait for a clear break through one of the sides, before considering the next directional move.
If the S&P 500 exits the range through the lower side of the range, at 2727, this may open the door to some further declines. We will then examine a possible drift to the 2629 obstacle, marked by the lows of April 7th and 8th, which could provide a bit of support. If so, the S&P 500 might rebound somewhat, but if it struggles to get back above the 2727 barrier, the bears could take advantage of the higher price and push the index down again. If this time the 2629 hurdle fails to provide support and breaks, that may increase the chances of seeing the S&P 500 moving lower, where the next possible support level could be at 2540, which is marked by an inside swing high of April 4th.
Alternatively, if the upper side of the range, at 2973, gets broken, this could attract a few extra buyers into the game. The next potential resistance area might be near the 3038 obstacle, a break of which may send the price towards the highest point of March, at 3138.
Overall, NZD/JPY remains within a wide range, roughly between the 63.55 and 66.15 levels. Despite the pair being slightly closer to the lower end of that range, we will remain neutral and wait for a clear break outside of the range, before examining the next directional move.
If the pair goes ahead and violates the lower side of the aforementioned range, this could temporarily spook the bulls from the field and allow more bears to join in. NZD/JPY might then travel to the 63.08 obstacle, marked by the lowest point April, which may provide a hold-up for the rate. The pair might stall there for a bit, or even retrace slightly higher, however if the rate stays below the lower side of the range, this may lead to another round of selling. If this time the 63.08 territory breaks, NZD/JPY could travel to the next potential support area, at 61.77, marked by the low of March 23rd.
In order to examine higher levels, a break of the upper bound of the aforementioned range would be required. If NZD/JPY pushes through the 66.15 territory, the rate might get picked up by more buyers and the pair could rise to test the 66.62 obstacle, which marks the low of March 6th and the high of March 11th. If that hurdle is not able to withstand the bullish activity and breaks, the next possible resistance level to consider could be at 68.06, marked by the highest point of March.
During the European morning, we get Germany’s preliminary GDP for Q1, and the second estimate of GDP for the Eurozone as a whole. Germany’s economic activity is expected to have contracted 2.1% after stagnating in Q4 2019, while for the bloc as a whole, the second estimate is forecast to confirm that the Euro area economy shrank 3.8% after expanding only 0.1% in Q4.
In the US, apart from the retail sales, industrial production for April is also due to be released, as well as the preliminary UoM consumer sentiment index for May. IP is anticipated to have fallen 11.5% mom, after declining 5.4% in March, while the UoM index is expected to have slid to 68.5 from 71.8.
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