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Market Wrap – August 2020

   

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Another month and another increase in the number of coronavirus cases all around the world as this now passes 25 million with over 850,000 deaths.  The coronavirus pandemic is not going away any time soon, and it continues to impact everyday life and more importantly the global economy.  Economies of all sizes around the world are feeling the wrath of the COVID-19 pandemic as central banks have dug deep into their toolboxes to attempt to save their countries from total collapse economically. 

As an example of the devastating impact, the British economy is now officially in a recession as it has experienced two consecutive quarters of contraction.  

Lockdowns and restrictions put in place due to the coronavirus has severely impacted economic activity and as a result, the U.K. economy contracted by 20.4% in the second quarter of 2020, compared to the previous three months.  However in a positive, gross domestic product (GDP) expanded by 8.7% in June as the aforementioned lockdown measures started to ease, which is now typical of many countries who are attempting to kickstart their economies.  In the recent U.S. Federal Reserve meeting, central bank officials “agreed that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term and was posing considerable risks to the economic outlook over the medium term,” the meeting summary said.

EURUSD

During the month of August, the EURUSD has spent most of its time attempting to break through the key resistance level at 1.19, however in doing so it has pushed through ever so slightly and reached a two year high above 1.19.  On several occasions during the month, it has reversed strongly after meeting solid selling pressure, and the 1.19 level is now likely to continue to offer some resistance to higher prices, and after such a strong surge higher, a small retracement is likely but not guaranteed.  During the month it has also been well supported by 1.17 which has propped up on several occasions and kept it within its narrow range under 1.19.  Should the EURUSD make a clear break through the resistance level at 1.19, this level will likely reverse roles and provide support to the currency pair.  

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According to European Central Bank (ECB) Executive Board members Fabio Panetta and Isabel Schnabel, the ECB's efforts to keep euros flowing through the global financial system helps monetary stimulus reach the euro zone’s real economy as well as strengthening the currency’s international role.   “By broadening the scope of liquidity arrangements with non-euro area central banks, the ECB ensures the smooth transmission of its monetary policy to all parts of the euro area,” the officials wrote in a blog post.  Meanwhile, former ECB President Mario Draghi has commented about Europe's future in his first speech since departing the central bank, specifically its high debt levels.  Mr Draghi believes that Europe's high debt levels would only be sustainable if “good debt” was “used for productive purposes” instead of “bad debt” being used for unproductive purposes.  He stated that Europe will only fully recover from the economic impact of the coronavirus pandemic if governments use their vastly increased debts to invest in young people, innovation, and research.     

GBPUSD

Like the EURUSD the GBPUSD in August has generally moved sideways meeting resistance at a key level and being well supported during the month keeping it within a narrow range.  In the last two weeks of the month the GBPUSD made repeated attempts to break through the now significant level of 1.3250 which has repelled prices and offered strong resistance to higher prices, before finishing the month by surging higher to an eight month high.  During this consolidation, the GBPUSD has enjoyed some solid support from another key level at 1.30 level which it broke through a few weeks ago on its strong surge higher.  Leading up to this recent consolidation above 1.30, the previous two weeks saw the GBPUSD surge higher through two key levels, before its recent consolidation in a range between 1.30 and a then five month high around 1.3250.  The 1.3250 level may provide support if the GBPUSD eases a little.  Should the recent support at 1.30 fail, then either of 1.25 or 1.2650 may be expected to step in and provide some support to a declining GBPUSD.

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As the British economy has experienced two consecutive quarters of contraction, it is now officially in a recession, however Bank of England (BOE) Chief economist Andy Haldane believes the economy is already recovering well.  He believes Britain’s economy is on track for a speedy recovery from the COVID-19 situation, suggesting the U.K. economy has already regained as much as half of the losses triggered by the pandemic, thanks to strong consumer spending.  Mr Haldane asserts “now is the time to see the economic glass as half full rather than half empty”, as official statistics show a strong increase in the number of workers returning to their offices.  He added, “The foundations for an economic recovery – a rapid one – are already in place, hiding in plain sight. Economic activity in the UK is not falling like stone, in fact it has now been rising for more than three months, sooner than anyone expected. It has also recovered far faster than anyone expected.”

AUDUSD

The AUDUSD has also experienced a relatively positive August being well supported by 0.7050 and moving through to its highest level in 18 months above 0.7350.  Several weeks ago, the AUDUSD pushed strongly through the key 0.7050 level to reach a then 18 month high above 0.7250 before consolidating and trading in a narrow range in the last few weeks.  The 0.7050 level has played a key role in the last few months first providing resistance to the AUDUSD and more recently supporting price.  Should the support at 0.7050 fail, this level may reverse roles and provide some resistance again.  For the month or so before the break through the 0.7050 level, the AUDUSD had seemed content to remain within a range between another key level of 0.6850 and the resistance at 0.7050.  It has also enjoyed support from another key level in 0.6850 however should support at 0.6850 fail, then the 0.6750 level is also likely to step and offer some support having been a significant level earlier in the year.

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In its August board meeting earlier in the month, the Reserve Bank of Australia (RBA) kept the official cash rate at its historic low of 0.25%, despite the Victorian Government imposing stage 4 restrictions across Melbourne to contain a second wave of COVID-19 infections.  There are strong indications that this rate will remain low for many years to come, with RBA Governor Dr Lowe saying in the post-meeting statement, that Australia's economy was experiencing its biggest contraction since the 1930s.  The minutes have now been released and they show a central bank with no immediate need to adjust its bond buying program.   "Members agreed, however, to continue to assess the evolving situation in Australia and did not rule out adjusting the current package if circumstances warranted," the minutes said.  "Board members ... considered it likely that fiscal and monetary support would be required for some time given the outlook for the economy and the labour market."  These comments follow the Governor’s comments post meeting about rates not moving any time soon.

US30

The US30 index has enjoyed a strong move throughout August steadily moving higher to a six month high above 28700 to close out the month.  It is now getting closer to its previous all time highs above 29000 which may provide some resistance to higher prices.  In the middle of the month the index met stiff resistance at 28000 and tried for more than one week to move through before eventually pushing through that level.  It eased a little after the break receiving some support from 28000, before resuming its upward move pushing it to the six month high.  In the two weeks leading up to the resistance at 28000, the US30 index moved steadily higher reaching a six month high just above 28000, forming a solid reversal bar showing a rejection of anything above 28000 as it was sold off quickly moving it back down below this key level.  Should there be no support from the 28000 level, the 27000 level may step in and provide some support to the index.

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Two weeks ago the U.S. Federal Reserve (Fed) released the minutes from their last policy meeting, and as always, the markets look to digest and detect any clues about a change in their policy outlook.  At their last meeting, the central bank decided to keep short-term interest rates anchored near zero, citing an economy that was falling short of its pre-pandemic levels.  Due to the significant impact of COVID-19 on the U.S. economy, Fed officials said they expect to hold the current overnight borrowing rate to a range of 0%-0.25% until they are “confident that the economy had weathered recent events and was on track to achieve the Committee’s maximum employment and price stability goals.” 

Gold

For the most part of August, gold sat on and enjoyed support from the key $1900 level.  To start the month, it fell sharply from its all time high around $2075 however it was stopped well by strong support around the $1900 level which has been able to buffer the fall and allow it to consolidate in the time since, even allowing it to rally back above $2000 before returning to support.  In the last two months or so it has steadily climbed higher off support at the key level of $1675, before the recent surge.  Just before its recent surge, XAUUSD consolidated around eight year highs above $1800 after moving steadily higher in the previous few weeks, and this level may provide some support should gold fall back through support at $1900 and decline from its current consolidation.  

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As the world continues to tackle the coronavirus pandemic, gold is enjoying a resurgence as investors flock to this haven.  It has been very well supported this year as central banks around the world have dug deep into their toolbox and launched massive stimulus measures to combat the economic fallout from the coronavirus.  All the economic problems remain that will support gold for some time yet, as governments continue with their substantial stimulus measures.  In the minutes from their last meeting, the Fed expressed their concern that the coronavirus would potentially pose dangers to the financial system and likely continue to stunt growth, as they made comment on the future of the economy.  At their meeting, Fed officials “agreed that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term and was posing considerable risks to the economic outlook over the medium term,” the meeting summary said.

UK Oil

There isn’t much to report about UK Oil’s movement during August as it has enjoyed another relatively quiet month trading in a very narrow range above a recent key at $43.  It very slowly moved through this in July and has since ever so slightly crept higher.  In the last few weeks, it has enjoyed some support from the $43 level.  In early June UK Oil made two solid runs towards a then three month high and met stiff resistance at $43 on both occasions.  Rather than breaking strongly through this level, it was very subtle.  It is currently showing no signs on wanting to move anywhere other than its very narrow range above $43.  Throughout May, UK Oil slowly but surely moved higher to that three month high, before falling sharply, and then making repeated attempts to push passed the current resistance around $43.

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Oil prices have continued to be supported from some positive economic data showing some signs of economic recovery post COVID-19 lockdowns, however the lid is being kept as coronavirus cases continue to grow globally, now passing 22 million cases.   In the hardest hit country in the United States, there are some signs that parts of the U.S. hardest hit by the coronavirus outbreak may be improving, with Arizona reporting the smallest increase in new infections in two months and Florida announcing the fewest new cases since June.   A measure of builder sentiment in the U.S. jumped to its highest since 1998, indicating a bright spot in an economy staggering from the coronavirus pandemic.  Equities around the world are trading near highs, especially the U.S. S&P 500 Index, which has been accompanied by fresh stimulus out of China’s central bank.  Officials from the United States have said China is conforming with the first phase of the trade deal between the two nations signed in January.   Chinese state-owned oil firms have tentatively booked tankers to transport at least 20 million barrels of U.S. crude for August and September.

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