Daily Market Outlook, July 27, 2020 

Asian equity market is mixed this morning as signs of a second wave of Covid-19 cases broadly offsets growing evidence of a rebound in economic activity. The former is providing an overall cap on sentiment, with new infections remaining elevated across Hong Kong and Tokyo, while spikes in cases were reported in a number of Chinese regions. 

Of late, in the US, Fed policymakers have been very vocal about their worries that the economic recovery could falter with the rise in Covid-19. Last week’s reported increase in US jobless claims won’t alleviate those worries. With the risks edging towards further support, incoming data is likely to receive increased scrutiny. Today’s durable goods orders report for June is expected to show a further rise from May, following the big declines seen in March and April. Transport orders are expected to have picked up but the real focus will be on the ‘core’ ex-transportation measure for evidence on the underlying trend in US activity. 

Later today, Congressional Republicans are set to unveil their latest stimulus plans, with reports suggesting this will include a $1,200 per person payment. Friday’s release of the ‘flash’ PMIs across a number of Eurozone countries, noted a further improvement in sentiment this month, ahead of the agreement on the details of the EU recovery fund. The recovery was especially noticeable in Germany, where the composite reading rose to a 23-month high led by services. Today’s German IFO survey is expected to confirm this improvement, with the headline measure forecast to rise to 89.1 from 86.2. However, the focus will also be on the components of the survey to see how much is being driven by current conditions and how much is due to increased confidence around the future. 

Brexit negotiations continue in the coming week, following last week’s round which seemingly resulted in little progress being made towards agreement on the future trading relationship. While reports suggest some headway was made last week on issues such as transport and energy, overall the talks remain deadlocked on two key issues, fishing rights and state subsidies with the UK’s Brexit negotiator suggesting that ‘the gaps are still significant’. Overnight, the latest Lloyds Business Barometer will be watched for further signs of a near-term improvement in sentiment.

CFTC data for the week through Tuesday July 21st show speculative accounts adding significantly to their overall short position in the USD, with the aggregate bear bet on the USD extending by a little over USD2bn to reach a fresh cycle high of USD19.2bn. This is the biggest aggregate short on the USD since 2018 and extends the run of bearish positioning (in aggregate) against the USD for a 20th week.  Once again, the EUR accounts for virtually all the positioning shift against the USD (and virtually all of the overall USD short position). Net EUR longs rose USD2.2bn this week to reach USD18bn, or a little over 125k contracts, the biggest bull bet on the EUR since the spring of 2018. The positioning shift reflects an increasing preponderance of gross EUR longs, rather than any significant covering of gross EUR shorts which remain more or less stable; gross EUR short covering was the primary motivation for the development of the net EUR long after March.

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

  • EURUSD: 1.1600 (586M), 1.1650 (250M)
  • USDJPY: 105.50 (210M), 106.00 (570M), 106.50-55 (350M)
  • AUDUSD: 0.7085 (400M)

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

GBPUSD Bias: Bullish above 1.25 targeting 1.28

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

USDJPY Bias: Bullish above 107.50 Bearish below

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 lok 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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