Market Sentiment Stays Subdued, GBP Gives Back Recent Gains

With daily coronavirus cases hitting a fresh record high yesterday, investors continued to abandon riskier assets in favor of the safe havens. On top of that, what may have also been weighing on market sentiment are developments pointing to no fiscal aid in the US before the presidential election. In the FX world, the pound was the second loser in line, following headlines suggesting that the gap of differences between the EU and the UK is very hard to close.

Equities Slide, Safe Havens Shine, Pound Turns South

The US dollar traded higher against all but one of the other G10 currencies on Thursday and during the Asian morning Friday. It gained the most versus NOK, GBP, NZD, and AUD in that order, while it was found virtually unchanged against JPY.

The strengthening of the US dollar and the Japanese yen, and the weakening of the risk-linked Kiwi and Aussie suggest that market sentiment remained subdued for another day. Indeed, looking at the performance of global equity indices, we see that major EU and US ones were a sea of red, with the negative morale rolling into the Asian session today as well. Although Hong Kong’s Hang Seng is up 0.78%, China’s Shanghai Composite is virtually unchanged, while Japan’s Nikkei 225 and South Korea’s KOSPI are down 0.36% and 0.69% respectively.

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With daily coronavirus cases hitting a second consecutive record yesterday, investors’ concerns over the performance of the global economy continued to intensify, especially following headlines suggesting that a potential vaccine could be distributed later than previously thought. Remember that on Tuesday, Johnson & Johnson said that it had temporarily stopped trials of a potential coronavirus vaccine, due to an unexplained illness in a study participant. On top of that, what may have also been weighing on market sentiment are developments pointing to no fiscal aid in the US before the presidential election. On Tuesday, Democrats rejected a USD 1.8bn offer from President Trump, while yesterday, Senate Majority Leader Mitch McConnell opposed the President’s idea to raise his offer.

As for our view, it remains the same. Markets continue to trade in a risk-off manner, but the technical picture of several indices, especially the US ones, remains relatively positive. Thus, we still believe that we are in a corrective phase rather than a short-term bearish reversal. Having said all that though, even if we see a rebound in the next days, we will be reluctant to trust a long-lasting recovery. We will stick to our day-by-day approach. As we already noted, the coronavirus continues to spread at an extremely fast pace, with most nations around the globe tightening their restrictive measures again. Another risk event on investors’ agenda is the US election which is schedule to take place in less than 20 days. The closer we get to the election day, the more cautious market participants will be.

Now, returning to the FX sphere, the British pound was the second loser in line among the G10s, perhaps due to signs that the obstacles keeping the EU and the UK from reaching common ground on trade are very hard to overcome. UK Brexit negotiator David Frost said on Twitter that he was “disappointed”. Although the pound rallied on Wednesday following reports that the two sides are willing to continue negotiations past the mid-October self-imposed deadline, anything suggesting that there is still a huge gap of differences is likely to result in more setbacks. Due to the current risk-off environment, we prefer to exploit any pound gains on positive headlines, against its risk-linked counterparts, like the Aussie and the Kiwi. On the other hand, any losses due to worrisome news are likely to be magnified against the safe havens, the likes of the dollar and the yen.

DAX — Technical Outlook

Looking at the overall picture of DAX on the daily chart, we can see that the index continues to trade inside a rising channel pattern. The price recently took a hit and our cash index is currently closer to the lower bound of that pattern, however, until that lower side of the channel is broken, we cannot aim for further declines. Instead, if that bound holds, this might attract the bulls back into the game, potentially helping the index to climb back up again. For now, we will take a cautiously-bullish approach.

Another small decline could bring DAX to the lower side of the rising channel. If that line is capable of halting the slide, the bulls might quickly jump back into the action and drive the index north again. If so, the price may travel to the 12945 hurlde, marked by the high of September 29 thand the low of October 14 th, or to the current highest point of October, at 13189. If the buying doesn’t stop there, the next potential resistance levels to consider could be at 13340, or at 13461, marked by the highs of September 14 thand 3 rdrespectively.

On the other hand, if the lower side of the aforementioned pattern breaks and the price falls below the 12339 hurdle, marked by the lowest point of September, that may invite more sellers into the game, as a forthcoming lower low would be confirmed. DAX could then drift to the 11955 zone, a break of which might set the stage for a push to the 11587 level, marked by the low of June 15 th.

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GBP/USD — Technical Outlook

This week, we saw GBP/USD shifting back below the psychological 1.3000 zone and coming close to one of its key support areas, at 1.2864, which is the current lowest point of this week and also marks the so-called “neckline” of a possible double top pattern. Such patterns tend to be bearish, however, a break of the “neckline” is required, before we could aim for lower areas. For now, we will take a neutral stance.

If GBP/USD goes ahead and drops below the aforementioned 1.2864 hurdle, or even below the 1.2845 zone, marked by the low of October 7 th, that may spook the remaining bulls from the field for a while. The pair could then travel to the 1.2805 area, marked by the low of September 30 th, where it might stall for a bit. Even if the rate rebounds from there, as long as it stays below the 1.2845 barrier, the downside pressure could remain. If so, another drop may bring GBP/USD back to the 1.2805 territory, a break of which might set the stage for a push to the 1.2751 level, marked by an intraday swing high of September 25 thand an the low of September 28 th.

Alternatively, a strong reversal back above the 1.2944 barrier, marked by an intraday swing high of October 14 th, may also place the rate above all of its EMAs, possibly inviting the bulls back into the field. GBP/USD might then climb to the psychological 1.3000 mark again, a break of which could clear the path to the 1.3064 level, which the high of October 14 th. Slightly above sits another potential resistance level, at 1.3082, marked by the current highest point of October, which might also get tested.

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During the European session, Eurozone’s final CPIs for September are coming out, but as it is always the case, they are expected to confirm their initial estimates.

Later in the day, we get the US retail sales and industrial production for September. The headline retail-sales rate is expected to have held steady at +0.6% mom, but core sales are forecast to have slowed to +0.4% mom from +0.7%. Industrial production is expected to have accelerated somewhat, to +0.6% mom from +0.4%.

As for the speakers, UK PM Boris Johnson is likely to set out his approach to the Brexit talks.

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Originally published at https://www.jfdbank.com on October 16, 2020.

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