Last week sterling reversed losses from the week prior, continuing the sideways churn since the end of March. On Thursday, the 200-day moving average for the second time in three weeks acted as a ceiling for GBP/USD. Stock market fluctuations continue to have an impact on GBP, evidenced by the statistically significant 20-day correlation of 0.54 between cable and the MSCI World Stock Index.
U.S. president, Trump, is pivoting towards “evidence” that the coronavirus came from a lab in China. Further developments on this front is seen as a catalyst for increasing tensions in an already tenuous relationship. Look for risk trends to remain an impact on sterling as we move ahead. The infection rate is showing progress, which is an encouraging sign, but the kick-start plan for the economy and its effectiveness to get things moving and keep the virus at bay is very much up in the air.
Last week there were few data releases. This week we have the BoE on Thursday along with the release of the inflation report. Rates are expected to remain just a tad above the zero-bound. Gfk Consumer Confidence Flash index released on the same day is expected to show dour sentiment.
GBP/USD 200-day Acting as a Ceiling
Last week the euro lifted to a one-month high off the 35-year trend-line we have been discussing the past couple of months. It remains a very important technical threshold, with 1.0635 seen as one of the most important levels in all of FX. Despite the single currency holding up, the outlook is not particularly favourable for the fragile Euro-zone.
Last Thursday, the ECB furthered its support for commercial banks in addition to giving us another acronym to regurgitate – “PETLTROs” – Pandemic Emergency Longer-term Refinancing Operations. This program was set up to allow the ECB to pay qualifying banks to lend to corporate borrowers that are credit worthy. Asset purchases were not increased but the ECB is anticipated to do-so if they deem necessary. On Wednesday, Euro-zone retail sales are expected to have plunged in April by 10.5% from the month before.
The US dollar has been on its back-foot until today, when it had strung together six consecutive days of losses as of Friday against a basket of major currencies. But do not count the dollar out, it may be declining versus developed market currencies, but it is holding its bid against emerging market currencies. Keeping a close eye on the EM space as another surge in the greenback against the likes of MXN and ZAR could be a lead on another run against the majors. Trump pivoting towards pinning the virus on China had USD/CNH surging on Friday.
At last week’s FOMC meeting Fed Chair Powell expressed sentiment that they expected the U.S. to bounce back rapidly from a recession. We do not hold their level of optimism as we expect the return to normalcy to be slow and choppy. The Fed may be able to provide liquidity, but they cannot manufacturer revenues for struggling businesses. On Friday, the Non-farm payrolls figure is expected to show 21 million jobs lost in April, with the unemployment rate rocketing to 16%.
Last week we pointed out that CAD was not behaving as one would anticipate given the incredible collapse in oil prices. However, this did not necessarily mean the short-term breakdown between oil and the Canadian currency spelled a full-on bearish reversal for USD/CAD. During the two days to end last week the pair sharply reversed course following a test of the April low. A rise to and above 1.4667 again will bring in the prospects of much higher prices for the dollar. The Canada jobs report is due out on Friday. Analysts are looking for 2.75 million jobs to have been lost last month, with the unemployment rate expected to jump to 16%, matching the U.S.
The Australian dollar may have hit a peak or very near it; just ahead 0.6700 is seen as a major barrier to cross. AUD/USD remains generally mired in a broad long-term downtrend. Increased tensions between the Donald and China will not be good for AUD as risk trends could derail the recovery. On Tuesday, the RBA is expected to keep rates at a record low 0.25%.
USD/JPY has been quiet lately, and the BoJ meeting last Monday did little to spark volatility. The net-effect of nothing was not unexpected as the central bank does little these days to move the currency, even if last week they signaled unlimited bond buying. The outlook for the Japanese yen is generally a difficult one to get a hold on, as it has been in a tug-of-war between risk trends and broad dollar influence. It is the Golden Week holiday through Wednesday.