Daily Market Outlook, August 5, 2020

Daily Market Outlook, August 5, 2020 

Negotiations on a new US virus relief package have continued over the last couple of days though, as yet, are said to have only yielded ‘a little bit of progress’. Negotiators have committed to reaching an agreement by the end of the week, with the House and Senate expected to vote on the package next week. In the meantime, the market risk tone remains more considered with sporadic reports of rising Covid-19 cases impacting on sentiment. Meanwhile, the Caixin services PMI in China disappointed, dropping from 58.4 to 54.1, versus expectations of only a small fall to 58.0. 

Notwithstanding the rise in the July manufacturing ISM earlier this week, concerns remain elevated that the US economy is slowing. Expect the July services ISM to have remained above the 50 mark, look for the headline balance easing back to around 53.0 from 57.1 previously. Meanwhile, the July ADP report is expected to show a modest gain (relative to the declines seen earlier this year). Look for a 1.5mn rise after last month’s 2.4mn rise. These numbers should be consistent with a deceleration but, not stalling of, economic activity, though the overall prospect of a sustained recovery depends in part on whether further fiscal stimulus is agreed. 

In the UK final print of the services PMI is expected to be broadly unchanged from the flash estimate of 56.6 ( look for a modest upward revision to 56.8), consistent with the view that the economy is in the midst of a bounce in activity. 

The extent to which sentiment remains buoyant will be a key consideration for the Bank of England which delivers its latest monetary policy decision early tomorrow morning. Amid the extremely uncertain economic outlook beyond the current short-term economic rebound, the Chief Economist Andy Haldane has described the situation as “so far, so V”. That uncertainty beyond the “V” – with one risk being that it morphs into a “W” – relates not only to how the pandemic situation evolves and the reaction of households and businesses, but also to how much permanent scarring there may be in the economy as a consequence of previously enforced lockdowns and ongoing restrictions such as social distancing. For now, with evidence that the economy is recovering from the low point in April, the MPC is likely to keep policy unchanged, including maintaining Bank Rate at 0.1%. Only last month, the MPC decided to extend the QE programme by a further £100bn, while at the same time expressing a desire to slow the pace of asset purchases. More important will be signals for policy going forward, based on the balance of risks for the economy. For the MPC, risks remain skewed to the downside, so the key message that the BoE is likely to repeat is that it will do everything it can to support the recovery

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

• EURUSD: 1.1675-80 (700M), 1.1725-30 (300M), 1.1750-60 (600M)
• AUDUSD: 0.7150 (355M)
• USDJPY: 105.00-10 (425M), 106.00 (560M), 106.25 (250M)

Technical & Trade Views

EURUSD Bias: Bullish above 1.1820 Bearish Below

EURUSD From a technical and trading perspective, as 1.1810 acts as resistance anticipate another corrective leg lower to test bids back towards 1.16. A daily close back through 1.1820 would negate the corrective thesis, opening a retest of 1.19

GBPUSD Bias: Bullish above 1.30 targeting 1.3250

GBPUSD From a technical and trading perspective, price tested pivotal trendline resistance at 1.3166, anticipated profit taking pull back playing out. As 1.30 continues to attract buying interest look for a test of 1.3250.

USDJPY Bias: Bullish above 105.50 targeting 107.50 

USDJPY From a technical and trading perspective, anticipated test of the equality objective at 104.50 attract big bids, printing a key reversal pattern on Friday, as discussed in today’s Chart Hit, as 105.50 acts as a support look for a test of the equality objective to 107.50

AUDUSD Bias: Bearish below .7170/90 targeting .6950

AUDUSD From a technical and trading perspective, test of stops and offers above .7220 has delivered the anticipated corrective phase, as .7170/90 now acts as resistance look for a test .6950 as ascending support.

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