Investors Lock their Gaze on the US NFPs
Global equity indices continued trending north yesterday as hopes of global economies reopening remained elevated. Investors’ morale got an extra boost after the US initial jobless claims came in better than expected. Today, all eyes will be on the US employment report for April as investors look for signs as to how the US economy continues to perform. Yesterday, the BoE slowed down its QE purchases, but added that this is not a material policy change.
EQUITIES KEEP GAINING AHEAD OF THE US JOBS REPORT
The US dollar traded lower against all the other G10 currencies on Thursday and during the Asian morning Friday. It lost the most ground versus CAD, SEK, CHF, NOK, and AUD in that order, while it underperformed the least against GBP.
The weakening of the US dollar, combined with the strengthening of the risk-linked Loonie and Aussie, suggests that markets traded in a risk-on fashion yesterday and today in Asia. However, the strengthening of the Swiss franc points otherwise. So, in order to get a clearer picture with regards to the broader market sentiment, we prefer to turn our gaze to the equity world. There, major EU, and US indices closed in the green, with the Dow Jones hitting a fresh record high. The only exception was Euro Stoxx 50, which slid 0.08%. The positive appetite rolled somewhat over into the Asian session today as well.
Hopes of global economies reopening remained elevated with investors’ morale getting an extra boost after the US initial jobless claims for last week fell below 500k for the first time since the coronavirus pandemic started more than a year ago. That said though, positive economic data are a double-edged sword for investors. On the one hand it means that the economy is performing better than previously anticipated, which is positive for risk sentiment, while on the other hand, it could revive fears that inflation may accelerate faster than previously anticipated and force the Fed to start normalizing monetary policy earlier. This is a negative for risk appetite.
With that in mind, today, investors are likely to lock their gaze on the US employment report for April. Nonfarm payrolls are expected to have accelerated to 978k from 916k in March, while the unemployment rate is anticipated to have declined to 5.8% from 6.0%.
This is likely to add more credence to the view that the US economy is recovering from the coronavirus-related damages at a fast pace, but it could also tempt some participants to start thinking as to whether the Fed should consider normalizing its policy earlier. Something like that could take the US dollar slightly higher and equities lower, but we don’t expect it to prove a game changer. We would consider such a counter reaction as a corrective move. We stick to our guns that with Fed officials repeatedly highlighting that it is too early to start tapering talks, President Biden willing to pass more supportive bills, and the vaccination programs around the globe progressing at a decent pace, the broader market sentiment is very likely to stay supported.
DJIA — TECHNICAL OUTLOOK
The Dow Jones Industrial Average index accelerated to new highs yesterday, while balancing above a newly-established short-term tentative upside line, drawn from the low of May 4th. The price tested the 34578 hurdle, which is now the new high on the cash index. Given the strong upmove, we might see a small correction lower, but if the above-mentioned upside line stays intact, another push higher may be possible.
As discussed above, a small decline could bring the price to the aforementioned upside line, which if holds, could help the bulls get back into the game. If so, DJIA might accelerate again, initially aiming for the current all-time high, at 34578, a break of which would confirm a forthcoming higher high and place the index into the uncharted territory.
Alternatively, if the index breaks the aforementioned upside line and falls below the 34330 zone, marked by the high of May 5th, that could open the path to some lower areas. DJIA may drift to yesterday’s low, at 34187, a break of which might clear the path to the 34035 level, marked by the low of May 5th. Around there, the price could also test another short-term tentative upside line drawn from the low of March 25th, which may provide additional support.
BOE SAYS THAT QE SLOWDOWN IS NOT A MATERIAL CHANGE
Yesterday, apart from the US initial jobless claims, we also had a BoE monetary policy decision. British policymakers kept interest rates unchanged at 0.10%, but they proceeded with a technical change in which the pace of weekly bond purchases slows down. That said, they reaffirmed that “as measured by the target stock of asset purchases, that stance remains unchanged”, adding that the QE slowdown is not a material change and that they are ready to reverse it if deemed necessary. With regards to their economic projections, they expected the UK GDP to have fallen less than previously expected in Q1, and to recover to pre-pandemic levels over the course of this year. On the inflation front, they said that it may rise above 2% towards the end of the year, but this is likely to be due to transitory effects and thus, the rise may prove to be temporary. Given that, they added that they do not intend to tighten monetary policy until there is evidence of achieving the inflation goal sustainably.
The pound gained initially on the decision to slow down QE purchases, but pulled back soon thereafter to give back almost all the decision-related gains. This may have been due to the fact that the QE slowdown was already expected, or due to the Bank’s note that this was not a major change. It could also be that GBP-traders remained cautious due to the uncertainty surrounding the Scottish election that could trigger a showdown with the UK government over its independence movement.
GBP/USD — TECHNICAL OUTLOOK
GBP/USD is currently trading between two of its short-term tentative lines, a downside one taken from the high of April 20th and an upside one drawn from the low of April 12th. Following the recent rebound from that upside line, the pair is now trading close to the downside line. As long as the rate remains between the two lines, we will stay neutral. In order to consider the next short-term directional move, a break through one of the lines would be needed.
If the aforementioned downside line breaks and the rate pops above the 1.3940 barrier, marked by yesterday’s high, that may attract more buyers into the game. GBP/USD could travel to the 1.3976 obstacle, or to the 1.4009 zone, marked by the highest point of April. Initially, the pair might get halted there, however if the bulls are still feeling comfortable, they may overcome that barrier and aim for the 1.4054 level, marked by the inside swing low of February 23rd.
On the other hand, if the rate breaks the previously mentioned upside line and falls below the 1.3835 territory, marked by an intraday swing high of May 3rd, that could spook the bulls from the field temporarily. GBP/USD might then drift to the current lowest point of May, at 1.3800, a break of which would confirm a forthcoming lower low, potentially opening the door towards the next possible support area, at 1.3750. That area marks the inside swing low of April 14th.
AS FOR THE REST OF TODAY’S EVENTS
Besides the US employment report, we also get jobs data for April from Canada as well. The unemployment rate is expected to have risen to 7.8% from 7.5%, while the net change in employment is forecast to show that the economy has lost 187.5k jobs after gaining 303.1k in March. A soft employment report could raise questions over whether the BoC acted correctly and scaled back its bond purchases at the prior gathering and may force the Loonie to correct lower.
We also have two speakers on today’s agenda and those are ECB President Christine Lagarde and BoE MPC member Ben Broadbent.
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