Daily Market Outlook, May 26, 2020 

A positive risk tone has continued through the Asian market session leading to further gains in equities. In particular, Japanese stocks are up by over 2%, supported by the country exiting its state of emergency and PM Abe’s announcement of a second budget aimed at providing further fiscal stimulus. In China, meanwhile, PBoC Governor indicated that the central bank would continue with its current target easing approach.

Equity and bond markets in both the UK and the US make a delayed start to the week today, following public holidays yesterday. While rising tensions between the US and China remain an underlying concern, overall optimism remains supported by continuing evidence of a slowing in new Covid19 cases in developed countries, which is leading to a slow reopening of economies and a gradual recovery in economic activity. Along with the recent pickup in the PMIs, yesterday’s German IFO survey for May showed an overall rise in business confidence, providing some optimism that the worst may be behind us. Nevertheless, the prospect of further monetary policy stimulus remains high with markets continuing to debate what further action central banks are likely to take. 

Speculation about the possibility of negative interest rates in the UK has added some pressure on sterling of late. BoE policy makers last week once again confirmed that other policy options are likely to be considered first but didn’t completely rule out a move to negative rates. For today, BoE Chief Economist, Andy Haldane participates in a CBI webinar in which any comments around what further steps the MPC could take to support the economic recovery will be keenly listened to by market participants. 

A number of other central bank officials are due to speak, including US Fed member Kashkari, Bank of Canada’s Wilkins and Poloz and ECB’s Lane, which will provide some insight into what additional stimulus measures are likely to be forthcoming from other major central banks. 

In the UK, the CBI retail survey will provide the first indications of consumer activity in May. The survey posted a record low in April but a major rebound seems unlikely this month considering that restrictions have only been eased very gradually. 

In the US, consumer confidence and housing data are due. The former is for May and is expected to show a rise – reflecting the gradual reopening of the US economy. However, housing data are forecast to show a large drop in new home sales given that they are for April.

CitiFX Quant  Asset Rebalancing Model notes a rotation from equities into bonds at the May month end. The signal is moderately strong coming in at -1.4/+1.3 historical standard deviations (hist. std. dev.) for equities and bonds respectively.  Almost all, but LatAm equities, are likely to see outflows with US and Canada receiving the strongest signals. In bonds, UK, US and Canadian markets are set to receive inflows. The FX impact notes the selling of USD against EUR and GBP at month end.

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

  • EURUSD: 1.0800-15 (1BLN), 1.0875 (364M), 1.0900 (720M), 1.0935-45 (1.3BLN)
  • GBPUSD 1.2125 (254M)
  • USDJPY: 107.25 (440M), 107.90-108.00 (650M)

Technical & Trade Views

EURUSD Bias: Bullish above 1.09 targeting 1.1050

From a technical and trading perspective, the rejection and reversal from last weeks 1.10 test has gathered momentum, the daily volume weighted average price has now flipped bearish, without a snap back rally and close back above 1.0935, price looks poised retest support back to 1.08, a failure here would be a further bearish development opening a move to test the downside equality objective at 1.0630 and the current year to date lows

GBPUSD Bias: Bearish below 1.2250 targeting 1.20 bullish above 1.23 targeting 1.24)

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 It is 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 If buying interest isn't sufficient to defend 1.2150 then bears will press for a test of the 1.20 target. UPDATE a breach of 1.23 opens a move to the equality objective at 1.24

USDJPY Bias: Bearish below 108.50 targeting 1.0465)

USDJPY From a technical and trading perspective, as 1.0850 contains the upside drift, look for a move back through 1.07 to develop downside momentum,however, a topside breach of 108.50 would delay downside objectives opening a retest of range resistance above 109 before lower again.

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. 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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