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Market Wrap – May 2020

   

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It has become clear that the coronavirus pandemic is not going away any time soon, as it continues to wreak havoc across the world.  Economies of all sizes around the world are feeling the wrath of the COVID-19 pandemic as central banks have taken emergency action to cut rates (some repeatedly) and increase stimulus measures.  The level of borrowing is moving into unchartered territory as the fears of the economic fallout are overwhelming.  The world now has almost 6 million people infected and over 350,000 deaths attributed to COVID-19.  Many countries are now starting to ease restrictions and hopefully reignite some economic activity however many believe it will not be as easy as flicking a switch.  As the Chairman of the U.S. Federal Reserve, Jerome Powell said, “this is a time of great suffering and difficulty and it’s come on so quickly and with such force that you really can’t put into words the pain people are feeling and the uncertainty they are realizing.”

EURUSD

During the month of May, the EURUSD has continued from April and been content to consolidate a little and trade between support at 1.075 and resistance at 1.10.   The current key level of 1.10 has offered resistance on several occasions in the last month or so, while the EURUSD has enjoyed some support from the 1.0750 level on several occasions now and it is propping up the currency pair well.  The last few weeks of the month have seen the EURUSD slow down a little, as it has been on a rollercoaster ride, surging back higher from a three year low near 1.06 up above the key 1.11 level in the second half of March, before easing back below 1.10 again.  So, the EURUSD is currently trading in a range between 1.0750 and resistance at 1.10, as it will be interesting to see which way it breaks.  

EURUSDDaily (7)

As the European Commission believes the European Union faces its biggest economic disaster since the 1930s, it has divulged plans for a 750 billion euro recovery fund.  Last week, France and Germany suggested to raise common European debt to support the EU’s economic recovery from the coronavirus pandemic.  Even though the financial impact could be felt for generations, European governments have agreed to major stimulus efforts to dampen the current crisis and keep its people employed.  The European Central Bank (ECB) vice president has supported the extraordinary stimulus packages launched in the EU, saying there were no other viable options for policy makers.  “At the end of the pandemic for sure that we will have higher public debt ratio. But the alternative of doing nothing is much worse,” he said on CNBC.  “It would be much worse in terms of the crisis. And it would be much worse in terms of the recovery phase,” he added.

GBPUSD

Like the EURUSD, the GBPUSD has traded in a narrow range during May spending most of its time trading around 1.23.  In the last two weeks of May the GBPUSD has rallied from a six-week low below 1.21 back up the key 1.23 level where it has met resistance and eased away again.  This is significant because the 1.23 level has played a role on a few occasions propping the GBPUSD up allowing it to spend the best part of the month or so consolidating and trading in a narrow range mainly between 1.23 and 1.25.  It is no surprise that 1.23 is now providing some resistance.  In the last month or so the GBPUSD has enjoyed two brief excursions above the 1.25 level, and the consolidation between 1.23 and 1.25 was much needed as the GBPUSD had been moving wildly back and forth in the few weeks before.  

GBPUSDDaily (7)

As widely expected, the Bank of England (BOE) recently voted unanimously to keep interest rates steady at 0.1% however made it clear it is ready to take further action should the economic disaster caused by COVID-19 continue to worsen.  That further action may be just be moving interest rates into unchartered negative territory.  The newly arrived BOE Governor Andrew Bailey said from the outset of his appointment in March, that he was against negative rates, saying, “On the whole, negative interest rates, no . . . it is not an area I would want to go to.”  That was then, this is now as the coronavirus continues to wreak havoc on the world.  Only two days ago the Governor told the UK's Treasury Select Committee, "We do not rule things out as a matter of principle.  That would be a foolish thing to do. But that doesn't mean we rule things in either."  Governor Bailey added that the central bank is "looking very carefully at the experiences of those other central banks that have used negative rates, and a number of them are actually publishing quite interesting assessments at the moment."

AUDUSD

Unlike the EURUSD and GBPUSD, the AUDUSD has moved reasonably well in May pushing up to a three-month high near 0.67 to finish out the month.  Earlier in the month, its rise slowed down a little, however it picked up the pace in the second of the month to push towards a key level of 0.6750.  During this time, it met some resistance around 0.6550 which was keeping a lid on prices and stopping any rallies from continuing higher to challenge the 0.6750 level.  During the last month or so, the AUDUSD has done well to recover and move back above 0.60 after it dramatically dropped sharply from around 0.66 down to an 18 year low near 0.55 in the space of two weeks.  The 0.6750 level now looms above as it has played a role on several occasions, most recently offering resistance earlier in the year.  

AUDUSDDaily (7)

The Australian job numbers were released recently and did not surprise anyone as the coronavirus pandemic continues to devastate economies around the world.  The devastation resulted in almost 600000 people losing their jobs in April.  According to the Australian Bureau of Statistics (ABS), the unemployment rate increased from 5.2% to 6.2% and total hours worked fell by about 9.2%.  “The large drop in employment did not translate into a similar-sized rise in the number of unemployed people because around 489,800 people left the labour force,” the head of labour statistics at the ABS, Bjorn Jarvis said.  The ABS explained that the relatively small increase in unemployment, was the result of a decrease in people actively looking for employment, even though around 600000 jobs were lost.  Despite the easing of restrictions around Australia, EY Chief Economist Jo Masters said the situation was likely to “get worse before it gets better”.

US30

After having moved very little during May, the US30 index has finished the month strongly moving to its highest level in nearly three months.  Throughout May the US30 index was applying pressure on the resistance at the key 25000 level and it has finished the month finally pushing through.  This level had previously turned the index away on several occasions in the last month, reinforcing how significant the 25000 level has become in this period.   If it is to maintain this break and continue higher, the 25000 level will likely become a level of support for the index.  Several weeks ago, it had rallied higher to a then one month high near 25000, while the key level of 22500 has well supported the index.   The US30 index is also likely to continue to receive some support from 22500 which previously provided resistance to the index several weeks ago.  

US30Daily (4)

The minutes from April’s U.S. Federal Reserve Meeting show how concerned the central bank is about the U.S. economy as it tries to navigate through the devastation caused by the coronavirus.  The Fed vowed to keep interest rates in a range between 0% and 0.25% and not move it until a recovery is firmly in place, as they remain concerned about a second wave of infections, and the impact on low-income households.  “Participants commented that, in addition to weighing heavily on economic activity in the near term, the economic effects of the pandemic created an extraordinary amount of uncertainty and considerable risks to economic activity in the medium term,” the minutes said.  When addressing the possibility of a second wave, the central bank said, “In this scenario, a second wave of the coronavirus outbreak, with another round of strict restrictions on social interactions and business operations, was assumed to begin around year-end, inducing a decrease in real GDP, a jump in the unemployment rate, and renewed downward pressure on inflation next year.”  

Gold

Gold spent the best part of May trading in a narrow range between $1700 and $1750 while being well supported by the key $1675 level.  In the first half of the month, gold rallied higher to reach an eight year high above $1760, off solid support at $1675.  For the last month or so, gold has enjoyed solid support from the key level of $1675, and it has rallied off this level on a few occasions keeping gold near the multi-year highs.  This is the most significant level presently and bodes well for gold to be able to continue to move higher.  It has generally moved well in the last two months surging higher from three-month lows around $1450 up to the recent eight year high.  If the support at $1675 fails, it will return to a range where it has spent the best part of this year trading in, trading around $1600.  

XAUUSDDaily (7)

As the world is rocked by the ongoing coronavirus pandemic, central banks around the world are taking drastic steps to curb the economic fallout from the virus, while regular reports are now appearing on steps towards a vaccine.  All these issues are having an impact on gold due to its haven appeal.  Even though the U.S. Federal Reserve (Fed) Chairman Jerome Powell reiterated only yesterday that the Fed is not considering negative interest rates, other central banks are which is why there remains speculation that the Fed may have little choice but to seriously consider it.  This is a view held by Zach Pandl from Goldman Sachs, who believes there could be a “big setback” in the U.S. economy from a second wave of coronavirus that causes another could prompt the Fed to consider a range of new policy options, including cutting interest rates into negative territory.  “I think fiscal policy would be the first step. I don’t think that cutting rates to negative territory would potentially be very helpful even in that environment,” he said.  

UK Oil

UK Oil has enjoyed quite the resurgence during May pushing up to its highest level in nearly three months, above $37.  This is of course a vastly different picture to last month, when UK Oil sank to its lowest level in many years below $20, many were wondering how low it could go.  In the first half of the month, UK Oil settled right around the key $30 level after rallying well off the multi-year lows below $16.  It has also consolidated well in the last week or of the month, trading above $35.  The current key levels remain $25 and $30 as both have influenced price action in the last two months.  Generally, in the last two months UK Oil had done well to consolidate above $25 after such significant falls in March.

UKOilDaily (4)

As speculation mounts on the origins on the devastating coronavirus pandemic, tensions between the United States and China have risen considerably in the last few months.  A resumption of pro-democracy protests in Hong Kong have placed further attention on China and again drawn in the U.S. into the conversation.  China is preparing to pass a national security law for Hong Kong which has raised concerns that Hong Kong could drop into its deepest unrest in more than 20 years.  U.S. President Donald Trump who has often singled out China for its alleged lack of transparency and handling of the coronavirus pandemic, has now added to his arsenal with comments on the current handling of Hong Kong.  He said last week that the U.S. would take seriously any attempt by China to gain more control over Hong Kong.   "Nobody knows yet" of China's plan, President Trump said.  But "if it happens, we'll address that issue very strongly," Trump said.  U.S. senators said they would consider introducing legislation to impose sanctions on Chinese officials.

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The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

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