Ongoing Issues With Brexit, US Economic Data, ECB In Focus
Britain’s services PMI number comes out better than expected, but remains heavily in contraction territory. The US ADP was better than the forecast. Bank of Canada kept the overnight rate unchanged. ECB take the spotlight today, together with the US jobless claims.
Australia’s Retail Sales
During the early hours of the Asian morning, Australia delivered its MoM retail sales figures for the month of April, which were already expected to come out as a major disappointment. The previous reading was set at +8.5%, whereas the expectation was for -17.9%. The actual number was slightly better, at -17.7%. However, it did not prove to be very positive for the Australian dollar, which is seen, at the time of writing, as the worst performer this morning, comparing to its other major counterparts. Given that the currency had already a decent uprise, it may give up some of its gains and go for a slight correction.
Britain’s PMIs And The Possibility Of A No-deal Brexit
Yesterday, Great Britain delivered its services PMI figure, which was initially expected to come out at 28.0, which was double the previous number. However, the actual number was at 29.0, which helped maintain the positivity, that is among pound traders currently. GBP/USD pushed a bit higher after the release. Today, during the European morning, Britain will deliver its Construction PMI number for May, which is believed to have improved from the previous devastating reading of 8.2. The forecast currently sits at 29.7, which is well above the previous reading. If the actual figure comes out better than expected, this could help strengthen the British currency slightly, however the uprise could be short-lived. As we can see, all the PMIs are still heavily below 50, despite beating their initial forecasts.
Although these are important economic indicators, they might have been pushed aside slightly, due to the current focus on the resumed Brexit talks. During the past couple of days, Britain and the European Union were discussing the possibility of a smooth GB-exit in end of December. Although Britain is keen on reaching a deal, the EU says that there is not much time to reach a consensus on that, because the current focus falls on the ongoing coronavirus problem, which clearly is still battering the eurozone’s economy. As we know, Boris Johnson has an option to ask for another extension, however this is not something that he wants to do, as his voters might turn their back on him. Yesterday, the Norther Irish assembly had voted in favour of UK calling for an extension of the transition period. Their main argument for that was that businesses cannot prepare for the exit during the pandemic. Britain is aware that they can request an extension before the EU summit on June 19 th, however we doubt that they will request one before that day, as it would not go well with Brexit supporters. Over the past few days, we have seen the British pound coming under some buying interest against some of the safe-haven currencies. This may continue for a bit more, but once the market sentiment changes to a risk-off one, pairs like GBP/JPY or GBP/CHF could start reversing back south. Basically, GBP could stay vulnerable to any negative headlines coming out from the Brexit front.
GBP/JPY — Technical Outlook
Looking at the technical picture of GBP/JPY, we can see that lately, the pair has been comfortably moving higher, while balancing above a short-term upside support line taken from the low of May 17 th. After hitting the 137.39 barrier, the rate started retracing slightly lower. That said, even if it slides a bit further, as long as it remains above the 135.75 hurdle, which is the highest point of April, this could help GBP/JPY to move back up again. This is why we will take a cautiously-bullish approach, at least for now.
A small retracement could bring the pair a bit lower to test the above-discussed 135.75 zone, whish if stays intact, may attract the bulls back into the game. If so, the rate could easily rise to the current highest point of this week, at 137.39, a break of which could set the stage for a move to the 138.64 level, marked near the highs of March 4 thand 5 th.
On the other hand, a further correction lower and a rate-drop below the 135.45 area, which is the high of April 30 th, may open the door to some lower levels. GBP/JPY could then slide to the 134.22 hurdle, a break of which might clear the way to the 133.66 zone, marked by an intraday swing high of June 1 st.
Some positivity from the US, however…
Yesterday, the US came out with economic data, which showed that they are trying to stabilise their economy during the coronavirus pandemic. All eyes were on the ADP nonfarm employment change and the ISM non-manufacturing numbers. Both were seen as a small breath of fresh air, despite being in worrying territories. The ADP reading showed that the country had lost around 2.76 million jobs in May. If we compare that number to the revised previous reading of -19.557 million, then we can say that it’s a huge improvement. That said, let’s not forget that just a few months before that, the monthly numbers were constantly floating between 70k and 200k. In fact, last time the figures were below zero, were back in the period between the end of 2008 and the beginning of 2010, when we had the previous financial crisis. Currently, the market seems to be taking all this as a temporary occurrence, however, if the actual readings will continue to appear in negative area, this may put pressure on the whole risk-on sentiment, which is currently floating in the market.
The ISM non-manufacturing PMI data, which is also know as the ISM services PMI, showed up not only better than the previous 41.8 number, but also better than the forecast of 44.0. The actual figure was at 45.4. Certainly, this reading kept the positivity in yesterday’s trading in the US equity market. That said, the reality is that the US service sector is still in contraction territory. If that continues for another couple of months, we may be seeing investors taking a more of a risk-off approach.
Bank of Canada keeps the rate unchanged
The Bank of Canada delivered its decision on its overnight rate at +0.25%, as was widely expected. No doubt that the impact of Covid-19 on the economy has been a quite significant one. Canada’s jobs market has been affected severely, with unemployment hitting 13% in April. The figure is believed to continue growing, however the BoC is staying away from cutting its interest rate again. The Bank was quite pleased with the fact that the lockdown measures are easing off and commodity prices managed to recover somewhat. However, the BoC understands that the negative impact on the country’s GDP in the future is something that they have to continue monitoring. As stated in yesterday’s press release: “The Bank maintains its commitment to continue large-scale asset purchases until the economic recovery is well underway. As market function improves and containment restrictions ease, the Bank’s focus will shift to supporting the resumption of growth in output and employment.”
ECB decides on its interest rate
The main focus today will fall on the ECB and its interest rate decision. As we have mentioned in our Strategic Report on Monday, at the ECB’s prior meeting, policymakers of this Bank kept interest rates unchanged, but eased the conditions of their TLTROs and introduced a new series of non-targeted pandemic emergency long-term refinancing operations (PELTROs). They also noted that they stay ready to adjust all of their instruments, as appropriate, to ensure that inflation moves towards their aim in a sustained manner.
EUR/USD — Technical Outlook
EUR/USD bulls have been dominant for the past few days, pushing the pair higher and overcoming some of its key resistance barriers. Yesterday, the rate got held near the 1.1258 hurdle, from which it is now retracing slightly lower. This move down may continue for a bit more, but if EUR/USD stays above its short-term tentative upside support line taken from the low of May 25 th, we will class this decline as a temporary correction before another leg of buying. Hence why we will remain cautiously-bullish, at least for now.
A further decline could test the aforementioned upside line, which if provides decent support, could act as a good bouncing ground for the pair. The bulls may step in again and drive EUR/USD back to the 1.1258 barrier, marked by yesterday’s high, a break of which would confirm a forthcoming higher high and may clear the path to the next potential resistance area, at 1.1333. That area arks the high of March 12 th.
Alternatively, if the previously-discussed upside line breaks and the rate falls below the 1.1154 and 1.1147 levels, marked by the highs of June 1 stand March 27 threspectively, that may temporarily spook the bulls from the field. Such a move may open the door for a further decline, where the next possible support zone could be at 1.1080, a break of which might set the stage for a drift to the 1.1035 hurdle, marked by the high of May 28 th.
As for the rest of today’s events
One of the economic numbers that traders will be monitoring today, will be the US initial and continuing jobless claims. Due to the COVID-19 pandemic, the numbers have skyrocketed in the beginning of April, however we are seeing a gradual decline in the initial jobless claims number, which is adding a bit of positivity in the market. The previous reading was at 2123k, however the forecast currently sits at 1800k. Although the expectation for this week’s number is on the lower side, from around mid-March, every single actual figure came out higher than the forecast. If to follow the same tendency, then we could expect a higher actual number.
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Originally published at https://www.jfdbank.com on June 4, 2020.