Daily Market Outlook, July 31, 2020 

Mixed news meant a mixed tone for the market in Asia. On the plus side were positive results from key tech companies which propelled Nasdaq futures higher in after-hours trading. China’s manufacturing PMI also increased for a second month to 51.1, although services edged down to 54.2, but overall the recovery remains on track. However, less positive for risk assets were reports of rising Covid cases in Australia and Japan, contributing to weaker equity markets in those countries. Meanwhile, US politicians have yet to agree to a new stimulus package urged by Fed Chair Powell. In the UK, the government has re-imposed lockdown restrictions in Greater Manchester and parts of east Lancashire and West Yorkshire.  

The first estimate of Eurozone Q2 GDP will show a very sharp contraction, but the question is by how much. Germany and France have already released their preliminary estimates showing falls of 10.1%q/q and 13.8%q/q, respectively. Spanish and Italian figures this morning will come ahead of the Eurozone release at 10am. The ECB’s June projections predicted a fall of 13.0% for the Eurozone, while the consensus forecast is for a slightly smaller (but still massive) drop of 12.1%. Monthly indicators suggest that activity began to recover from May, but the speed and scope of the bounceback remains highly uncertain. 

The ECB’s central scenario suggests that GDP is not expected to return to pre-pandemic levels before late 2022. The Eurozone flash CPI inflation estimate is also due today. The bigger-than-expected fall in yesterday’s Germany’s EU harmonised inflation measure to 0.0% from 0.8%, largely a result of a temporary VAT cut, will drag the Eurozone figure lower (Germany has a 28% weight in Eurozone inflation). The consensus forecast is for Eurozone headline CPI to fall to 0.2% from 0.3%, but the risk is skewed to a bigger decline. 

Across the pond, US June personal spending and income figures will be watched. The data have already been incorporated in yesterday’s Q2 GDP estimate (annualised fall of 32.9%), but they will nevertheless give a sense of how consumption evolved through the quarter. The latest figures for May showed a rise of 8.2%m/m after falling 12.6% in April and 6.6% in March. Look for a further rise of 5.5% in June, but that would still leave consumption below pre-Covid levels. A concern is that consumer sentiment fell back in July, according to the preliminary University of Michigan survey – we get the final report for July today which is forecast to show a small downward revision. 

CITIFX QUANT: Month-End Asset Rebalancing: July 2020 Estimate

The asset rebalancing signal notes a mild rotation from equities to bonds with a very weak signal at month end. More interestingly intra asset rebalancing—such as outflows from US equities and inflows in UK and European equities or inflows into all but UK and European bonds are likely to occur, albeit with weak signals overall. The FX signal from the rebalancing flows suggests USD selling against EUR at month end. 

Today’s Options Expiries for 10AM New York Cut (notable size in bold)

  • EURUSD: 1.1800 (854M), 1.1850 (516M), 1.1900 (1BLN)
  • USDJPY: 103.75 (440M), 104.05 (250M), 104.50 (200M), 105.00 (605M)

Technical & Trade Views

EURUSD Bias: Bullish above 1.16 targeting 1.1830

EURUSD From a technical and trading perspective, as 1.16 acts as support look for a test of the 1.1830 equality objective before a profit taking pause. A closing breach of 1.1550 would concern the near term bullish bias opening a deeper correction to 1.1450 UPDATE note Citi month end EUR buy signal, pullbacks to 1.1650/00 should see bids to take to price into a test of the pivotal 1.183/50. UPDATE target achieved, as discussed in yesterday’s live analysis session, look for potential local high today/Monday and a profit taking pull back to develop as momentum divergence develops

GBPUSD Bias: Bullish above 1.28 targeting 1.2950

GBPUSD From a technical and trading perspective, as 1.25 attracts sufficient demand, look for a grind higher to test offers and stop at 1.28. A closing breach of 1.25 suggests return to range and a test of range support at 1.2250.UPDATE target achieved, as 1.29 contains the rally look for a pullback to test 1.27 support.UPDATE price stalling at equality objective at 1.29 as 1.28 supports look for a test of offers and stops to 1.2950 before a pullback to 1.27 UPDATE target achieved, as 1.29 support now lok for a test of offers and stops to 1.3010 UPDATE price poised to test pivotal trendline resistance at 1.3166, look for profit taking pull back to develop

USDJPY Bias: Bearish below 106.30 targeting 104.50 

USDJPY From a technical and trading perspective, anticipated test of the equality objective at 108.13 saw bearish reversal patterns, setting up a move for  another test of 106 enroute to a pivotal 105 test UPDATE equality objective achieved as 107.30 caps the upside look for a retest of 106.30’s UPDATE 106.30 achieved as 106.75 now acts resistance look for a test of 104.50’s

AUDUSD Bias: Bullish above .7090 targeting .7220

AUDUSD From a technical and trading perspective, as .7100 now acts as support, look for a move to testing projected ascending trendline resistance .7220  next leg higher to test stops and offers above .7220 before a corrective phase to test .6950 as support.

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