Analysis | October 27, 2020

KTM FX Weekly: The recovery divergence could cap the EURSUD

  • Record new COVID cases
  • The Fibonacci ratio of 61.8% cap the price
  • All the eyes focus on the ECB and CCP meeting

EURUSD traded higher in the previous week, but the uptrend is capped at the 61.8 Fibonacci ratios. The week ahead 1.1880-1.1920 should be considered as potential resistance.

Fast-forwarding to this week, financial markets tumbled across regions as virus surges. Record new COVID cases are resurging in the US and the EZ. The global tally is 43,216,000 and up +386,000 since Monday.

Reported cases and deaths by country: In EZ, 11,824 new cases and 38 new deaths reported in Germany, 15,622 new cases and 73 new deaths in Belgium, 17,012 new cases and 141 new deaths in Italy, 17,396 new cases and 93 new deaths in Spain, 26,771 new cases and 257 new deaths in France.

It is first-world countries that seem to be having the most difficulty containing the new wave. It is raging in France, the UK, Spain, and Italy again, and Belgium also has a very bad outbreak. Authorities in all these countries have lost control, and it is hard to know how they will regain it. Italy and Spain have reintroduced sweeping new curbs as per media sources. Besides, the largest number of reported cases globally are still in the US, which rose +46,000 since yesterday to 8,899,000 as a weekend tally, according to the data from Johns Hopkins University.

COVID -19: Increasing concerns of a second downturn as Covid cases rises further across EZ and US; this may delay more US fiscal stimulus before US Presidential elections. As a result dollar gains in a surge of COVID-19 cases on Monday. The G10 currencies went on a southward spiral against the dollar on Monday. Local governments across Europe have tightened restrictions to curb an accelerating second wave of COVID-19 infections; thus, EUR down between 0.25%-0.55% across the board except against the Canadian dollar.

Bond market: The yield on the 10-year benchmark fell to 0.81 compared with at close 0.85 in the previous trading session.

Growth story: Latest Flash PMI data suggests that Europe is behind the US in the wake of new COVID-19 cases. IHS Markit cited that the US leads upturn, Europe, and Japan lag.

In a note on Monday, Chris Williamson, Chief Business Economist at IHS Markit, said, “The service sector consequently led the US expansion, though manufacturing also continued to report solid growth due to rising demand from households and businesses.

It was a different story in Europe, where increased local lockdown measures were implemented in the UK, and containment was tightened up considerably across the eurozone to fight second-waves of infections.”.

The recovery divergence could cap the EURSUD in the near term. We have highlighted that EURUSD remains cap and advises to buy on dips for the last two weeks.  

Data review: COVID-19 restrictions hit the service sector in Europe. 

  • French Flash Services PMI at 46.5 vs. 47.5
  • French Flash Manufacturing PMI at 51.0 vs. 51.2
  • Germany Flash services PMI at 48.9 vs. 50.6
  • Germany Flash Manufacturing PMI at 58.0 vs. 56.4
  • EZ Flash Services PMI at 46.2 vs. 48.0
  • EZ Flash Manufacturing PMI at 54.4 vs. 53.7

Data preview: The preliminary estimate of the eurozone third-quarter GDP will be this week’s highlight. Besides, the ECB meeting this Thursday will grab some attention. We expect an uplift in Q3 GDP after a record contraction.

Moody’s Analytics said, “We think eurozone GDP expanded 9.9% in the third quarter as the bloc’s economies rebounded from the lockdown last spring.”

ECB meeting: The next major move in EURUSD cast on this week’s ECB meeting (Thu). We and the market expect the ECB to leave all its policy settings unchanged, but we expect to highlight the risk in Q4. And we also hint at further easing of monetary policy in the December meeting.

“The case for further easing from the ECB is strong and perhaps getting stronger by the day, though we suspect they will wait until the December meeting when updated staff forecasts become available before officially announcing a greater PEPP purchase pace.” According to Nordea.

 Chinese Communist Party (CCP): In addition to the euro data, we also focus on Beijing’s headlines. China Communist Party led by Xi is set to meet in Beijing from October 26-29 to discuss a proposal for national development for the next five years-2021-2025.

In mid-October, the PBoC move hit the CNY and CNH; thus, EUR underperformed against the before rallied to 1.1900.

 TECHNICAL OVERVIEW

EURUSD ended last week with a gain of more than a percent. Now, it is facing stiff resistance at previous higher tops spread between 1.1880-1.1920 levels.

On the downside, supports exist at 1.1780- 1.1760 levels and 1.1690. As long as this support is not violated, one should expect a bounce back to 1.1850. Alternatively, a daily close below 1.1690 would result in a near-term reversal towards the 100MA.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

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