Daily Market Outlook, May 20, 2020 

Asian equity market mixed this morning following declines in US and European markets yesterday. US Fed Chair Powell, in testimony to Congress, called for more fiscal stimulus. White House advisor Kudlow said the administration was looking at a potential corporate tax cut but Republican Senate leaders said they were in no hurry to pass another stimulus bill. In the UK, Chancellor Sunak warned that the economy may not “immediately bounce back” from the coronavirus crisis and may suffer permanent scarring. 

UK inflation data as expected showed a sharp fall in annual inflation in April. Headline annual CPI fell to 0.8% (from 1.5% in March). The drop below 1.0% means that BoE Governor Bailey will have to write a letter to the Chancellor of the Exchequer explaining why the inflation target has been missed. 

The rest of today’s data calendar seems unlikely to attract much market attention. April Eurozone CPI data are final reading’s that are not expected to be revised from the initial estimates. Those showed inflation well below the European Central Bank’s target and it is likely to drop further near-term. Eurozone consumer confidence is expected to have fallen for the third successive month. May’s reading likely slipped to -26 from -22.7 in April.

BoE Governor Bailey and some of his colleagues on the Monetary Policy Committee will make a virtual appearance before the House of Commons Treasury Select Committee today. They will be quizzed on their reading of the current situations and their expectation for the pace of recovery. Last week Bailey noted his growing concerns that recovery from the current downturn will be protracted and repeated that the Bank stood ready to offer further policy support. Nevertheless, he downplayed the likelihood of cutting interest rates below zero, at least for now. However, the BoE’s Chief Economist Haldane in an interview over the weekend said that the MPC was examining a range of policy options including extending the range of assets that it purchases under its QE programme and the viability of negative interest rates. Haldane is not scheduled to appear today but his colleagues are likely to be asked for more detail on the policy options. 

The Federal Reserve will release the minutes of its last policy meeting (in late April) this evening. These are unlikely to add much to recent comments from Fed policymakers including yesterday’s testimony to Congress by Fed Chair Powell. However, it will be interesting to see the details of the discussions about the state of the economy and the remaining policy options (including negative interest rates).

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

  • EURUSD: 1.0860-70 (500M), 1.0900 (300M), 1.0930-35 (1BLN), 1.1025 (450M)
  • USD/JPY: 106.90-107.00 (1BLN), 107.70 (600M), 108.00 (934M) 108.50 (300M), 108.70 (500M)
  • AUDUSD: 0.6385 (375M), 0.6600 (380M)

Technical & Trade Views

EURUSD Bias: Bullish above 1.0750 targeting 1.1050

 From a technical and trading perspective, watch for continued reaction at the ascending trendline support towards 1.0750, a failure to defend this area would be a bearish development opening a move to test year to date lows. However if 1.0750 continues to hold look for a test of 1.09 interim equality objective and then onto a descending trendline resistance sighted at 1.0950

GBPUSD Bias: Bearish below 1.2250 targeting 1.20)

GBPUSD From a technical and trading perspective, the momentum trendline failure forewarned of the price decline through 1.23 support, as this level contains upside attempts look for a move to test the pivotal support cluster to 1.20 UPDATE noteworthy demand has picked up for GBPUSD FX options that would allow holders to sell the pound at 1.2000 and below over coming weeks. There’s already been demand for early July downside options as concern grows over the June 30 Brexit deadline

USDJPY Bias: Bearish below 108.50 targeting 1.0465)

USDJPY From a technical and trading perspective, range contraction persists,albeit with a downside bias, a breach of 106.80 should inject downside momentum. A topside breach of 108.50 would delay downside objectives opening a retest of range resistance above 109 before lower again UPDATE Huge $934mln option expiry Wednesday, can help contain near term too. Option implied volatility continues falling to ever new crisis lows, shows that options aren’t yet expecting actual volatility to increase, falling implied volatility consistent with range trading view

AUDUSD Bias: Bullish above .6450 targeting .6700)

AUDUSD From a technical and trading perspective, price testing pivotal .6568 prior cycle highs area if sufficient supply is seen here look for another leg lower to test trend support back to .6330 before another attempt to base and make another run towards the .6700 primary upside objective UPDATE note considerable momentum divergence developing this will likely be addressed in a move to test range support back to .6400 before a final attempt to make the .6700 primary upside objective 

 

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