Daily Market Outlook, August 28, 2020

Daily Market Outlook, August 28, 2020 

Asian equity market is mostly higher, supported by Fed Chairman Powell’s announcement yesterday of a shift towards a more flexible approach to inflation targeting, a sign that policy will remain accommodative for longer. European equity futures point to a positive open. Japanese stocks, however, tumbled late in the trading session after reports that Prime Minister Abe will resign for health reasons. German GfK consumer confidence fell for the first time in four months to ‑1.8 from -0.2.

The Lloyds Business Barometer was released earlier this morning. The survey showed overall business confidence in August rising for a third straight month to ‑14%, the highest level since March. All broad industries saw an increase in overall confidence, most notably the manufacturing sector. Sentiment, however, is still well below the historical long-term average.

Ahead today, the UK focus will be on Bank of England Governor Andrew Bailey’s opening remarks (delivered remotely) at the start of the second day of the Kansas City Fed’s annual economics symposium entitled “Navigating the Decade Ahead: Implications for Monetary Policy”. His comments will be scrutinised, especially after Fed Chairman Powell’s speech yesterday in which he said the US central bank will adopt an average 2% inflation target over time – meaning that it will allow for inflation overshoots to make up for previous undershoots, a shift closer to price level targeting. The UK policy framework, however, arguably already embeds a greater degree of flexibility.

As elsewhere, US inflation has fallen since the start of the pandemic. The personal consumption expenditure (PCE) deflator will be updated today, expect the headline measure to rise to 1.0%y/y in July from 0.8%y/y in June. Look for personal consumption itself to have risen by a relatively moderate 1.2%m/m in July, following the somewhat stronger rebounds in May and June. A concern for the outlook is that consumer confidence has fallen back. The University of Michigan consumer sentiment index for August is expected to reaffirm the preliminary reading of 72.8, slightly up from July, but well below June’s 78.1.

The Eurozone economic sentiment index – an aggregate of business and consumer confidence – will also be released, although it is not usually a market mover. It is expected to show a further rise to around 85.0 from 82.3. That would be a fourth consecutive monthly improvement, but it will remain below the long-term average of 100.

CITI: Month-End FX Hedge Rebalancing: August 2020 Preliminary Estimate

The preliminary estimate of month-end FX hedge rebalancing flows points to a net USD selling need on Monday, 31 August. Good performance of Japanese assets means that the sell USDJPY signal is amongst the weakest this month.  The signal to buy GBPUSD is strongest at 0.96 historic std. dev, although below the 1 std. dev threshold that we consider significant.The FX impact suggests USD selling against EUR and GBP at month end.

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

  • EURUSD: 1.1835 (451M), 1.1850 (372M), 1.1900 (450M)
  • USDJPY: 106.00 (658M), 106.50-60 (1BLN), 107.10 (205M)

Technical & Trade Views

EURUSD Bias: Bullish above 1.17 targeting 1.20 

EURUSD From a technical and trading perspective, the breach of trendline support and suggests that we may be entering an extended consolidation phase, as 1.1860/80 contains upside attempts look for a retest of 1.17 base before another attempt to test the psychological 1.20 UPDATE continued rotation around 1.18 ahead of Fed Chairs speech on Thursday, likely to be the catalyst for the next leg UPDATE price looks poised to retest prior cycle highs as 1.1840 acts a s support

GBPUSD Bias: Bullish above 1.32 targeting 1.35

GBPUSD From a technical and trading perspective, erratic price action into the end of last week, printing three daily reversal patterns, Friday’s bearish reversal on the Daily time frame flipped the daily chart bearish again, as 1.32 now acts as resistance look for a test of range support to 1.30 UPDATE as price sustains trade above 1.3250 look for a test of the primary trendline resistance sighted towards 1.35 as discussed in yesterday’s live analysis session. 

USDJPY Bias: Bullish above 105.50 Bearish below

USDJPY From a technical and trading perspective, as 106.50 acts as resistance look for another test of  support at 105.50 failure to find sufficient bids here will expose 104.18 again. Note DTCC shows a massive USD 7-billion 105.00 strike option expiries this week. Biggest collection Wednesday – USD 3.2-billion, and Thursday – 1.6-billion. Several billion Wed-Thurs from 105.75 to 105.40 too, but little above 106.00 UPDATE Abe news supports JPY the failure at 107 suggests another test of bids back towards 105.

AUDUSD Bias: Bullish above .7200 Bearish below

AUDUSD From a technical and trading perspective, reversal from the test of offers above .7250 finds support at .7150 as this contains the downside look for another run at .7300 before a more meaningful reversal UPDATE a closing breach of .7140 would delay the upside objectives suggesting a test of base support back to .7080 UPDATE pivotal projected ascending trendline resistance test looks to be in play, profit taking pullback anticipated as discussed in yesterday’s live analysis session

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