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Week Ahead: To Reopen or To Reclose?

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Fundamental analysis of Forex market

Coronavirus cases continue to increase worldwide.  From Brazil to China to the US, the number of cases has been increasing.  However, as we saw last week from several central banks, they are still ready to do whatever is necessary to provide support for their respective economies.  This will be one of the key themes running throughout the summer.  Watch the headlines this week.  The EU Council met last week, and it seems like a structure for a European Recovery Fund is in place, but meetings will continue in July to reach a consensus. In addition, both the UK and EU would like a Brexit deal sooner than later, and Boris Johnson has extended his deadline through July.  Global Flash PMIs for June and US Durable Goods will be the economic highlights this week.

As we mentioned in last week’s Week Ahead, coronavirus cases and central banks were going to be the main focus of the week.  With a light economic calendar, those should remain the primary focus for the markets this week as well. Brazil has overtaken the UK as the number 2 country in terms of coronavirus related cases in the world, behind the US.  Beijing, China reported 130 new coronavirus cases last week, moved from a level 2 to level 3 on the Coronavirus scale, closed food and vegetable supply centers in surrounding neighborhoods, closed schools, and cancelled flights!  They are taking this outbreak serious.  In the US, although hospitalizations and number of deaths are falling in states that were hit the hardest in March, such as New York and New Jersey, the numbers across the country as a whole are increasing.  In Arizona, Texas, and Florida, infection rates are increasing at over 4% a day.  Apple is re-closing select stores in Florida, Arizona, North Carolina and South Carolina.  Cruise Lines voluntarily suspended cruise ships from US ports until September 15th.  The World Health Organization even said on Friday that the virus is still spreading fast throughout the world and over 150,000 cases were reported Thursday worldwide, with half of them from the US.  This is the highest single day increase so far.  Next week, the coronavirus numbers should drive the volatility of the markets.  If these places can gain control of the spread of the virus, we should move back to risk-on mood.  If not, risk-off could be ahead.

If the spread of the coronavirus continues, traders need to begin wondering how much more countries and central banks have in their arsenal.  Last week, the BOJ announced another JPY 35 trillion for corporates and the Fed said they would begin buying US Corporate Bonds, in addition to the ETFs they have already been buying.  The BOE agreed to add an additional GBP 100 billion in QE and the SNB said they would continue to use intervention as their main tool to slow the strength of the Swiss Franc.   The ECB announced an increase of EUR 548.5 billion in LTROs at minus 100 bps! On the fiscal side, EU leaders met and discussed the European Recovery Plan, initially introduced by Germany and France last month.   Although there has not been an agreement yet, Germany’s Merkel said she is happy with the base structure of the fund and that discussions will continue in July.  Australia announced an AUD 1.5 billion infrastructure program.  The US is discussing a $1 trillion infrastructure plan as well.   It doesn’t matter if this is the first wave or the second wave.  What matters is “Can world governments and central banks continue to spend money to keep economies afloat”?

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Not only is the UK in the middle of watching for an uptick in coronavirus cases themselves, the country is still trying to work out a Brexit deal.  Both issues are causing volatility in the Pound.  Johnson said he would intensify talks into July but says it does not make sense for there to be prolonged negotiations into autumn.  The president of the European Commission, Von der Leyen, said that “the issues are well known: level playing field, fisheries, governance, the scope of our police and judicial co-operation”.  Watch for continued volatility in GBP pairs and EUR pairs, and specifically,  EUR/GBP!

In addition to the above items to watch next week, there is some economic data to be aware of, most notably global PMIs for July and US Durable Goods.  The PMIs will be the markets first look at July data.  Other economic data to note is as follows:

Monday

  • Australia: Gov Lowe Speaks
  • China: Loan Prime Rate 1Y
  • EU: Consumer Confidence Flash (JUN)
  • US: Existing Home Sales (MAY)

Tuesday

  • Global Manufacturing PMI Flash (JUN)
  • Global Services PMI Flash (JUN)
  • Global Composite PMI Flash (JUN)
  • US: New Homes Sales (MAY)

Wednesday

  • New Zealand: RBNZ Interest Rate Decision
  • Germany: Ifo Business Confidence (JUN)
  • Crude Inventories

Thursday

  • New Zealand:  Trade Balance
  • Germany: Gfk Consumer Confidence (JUL)
  • US: GDP Growth Rate QoQ Final (Q1)
  • US: Durable Goods Orders (MAY)
  • US: Initial Jobless Claims (week ending June 20th)

Friday:

  • US: Personal Income (MAY)
  • US: Personal Spending (MAY)
  • US: PCE Price Index (MAY)

Chart of the Week: Daily GBP/USD

Source: Tradingview, FOREX.com

GBP/USD traded off the lows of March 20th at 1.1410 up to the 200 Day Moving Average on April 14th and failed.  On April 30th, the pair tried once again to push through the same moving average and failed once again.  Finally, on June 5th, the pair finally broke through it for a whole 5 days and fell back below it near 1.2700.  Remaining above the 200 Day Moving Average at the point where it broke through was a difficult task.  Not only was there horizontal resistance just above near 1.2720, but there was also a downward sloping trendline off the election highs from December near 1.2850.  On June 10th, GBP/USD formed a shooting star candlestick formation fell 6 of the next 7 days, including Friday.  It also broke an upward sloping trendline off the March 20th lows to close near 1.2750, horizontal support.  If the pair continues lower,  next horizontal support is at 1.2296 then the 38.2% Fibonacci retracement level from the March 20th lows to the June 10th highs near 1.2271.  Below there is the 50% retracement level near 1.2100.  If the pair trades higher next week, there is horizontal resistance near Friday’s highs and the upward sloping trending near 1.2456.  Next resistance is the elusive 200 Day Moving Average  near 1.2692!

This week will once again be driven by coronavirus cases and monetary stimulus and fiscal policy.   Again, is this the first wave or the second wave?  It doesn’t matter.  Make sure to please always wash your hands and it would probably be a good idea to wear a mask when out in public!

Have a great weekend!