Daily Market Outlook, February 4, 2021
Equities in Asia retreated overnight, ending this week’s three-day bull run. Notably, China stocks moved lower amid concerns of tighter liquidity constraints from the PBoC. Meanwhile, US President Joe Biden indicated that he was not willing to reduce the $1,400 stimulus cheques, but signalled an openness to tightening the eligibility criteria.
Later today, the Bank of England (BoE) will deliver its first policy announcement of the year (12:00 GMT). No immediate policy changes are expected, which means Bank Rate is likely to remain at 0.10%, while the target size of the asset purchase scheme is also forecast to remain at £895bn. However, since the last update in December, plenty has happened – even more so since the BoE last updated its economic forecasts in November.
Today’s update, therefore, provides the MPC with a key opportunity to update the market on its latest thinking for the economy and ultimately what this may mean for future changes in monetary policy. On a positive note, it will report that last year’s fall in GDP - while still very large – is likely to have been less than previously expected. However, the current lockdown, which now seems likely to last for most of the quarter, means that GDP will probably fall in Q1 whereas the BoE was previously forecasting a rise. That suggests they will have to cut their GDP forecast for 2021 unless they now forecast a substantially faster recovery in the coming quarters. There are some grounds for doing so, given the vaccine rollout, but uncertainty about the timetable means the BoE may be reluctant to go too far down that road. What MPC members may feel more confident in saying is that they are now less concerned about the downside risks for the economy. However, they may still sound a note of caution on the potential longer-term damage from the pandemic.
The BoE is also due to provide an update on their recent discussions with banks about the feasibility of a cut in Bank Rate below 0%. Recent speeches by various members suggest that the MPC is divided on its potential effectiveness. Some of the external members see it as an effective tool in boosting the economy, while Bailey and some of the other internal members are seemingly more concerned about the potential negative effects on the financial sector. Even if the report concludes that a move below 0% is technically possible, it is likely to highlight that the financial system would also need time to prepare for such a move. In the meantime, the Committee will have to confirm the weekly pace of asset purchases for the immediate future. Maintaining them at £4.4bn per week would mean that the current tranche will last until September.
Ahead of the announcement, the UK construction PMI for January is expected to show a moderation to 53.0 from 54.5 previously. Elsewhere, the calendar is fairly light with the December US factory orders report unlikely to attract much attention ahead of tomorrow’s January payrolls release.
G10 FX Options Expiries for 10AM New York Cut
(Source DTCC)
EUR/USD: $1.1890(E585mln), $1.2000-10(E1.15bln), $1.2025-35(E1.4bln), $1.2045-50(E1.7bln), $1.2125-35(E575mln), $1.2150-60(E886mln)
USD/JPY: Y102.00($780mln), Y104.30-40($1.6bln), Y105.00($1.4bln), Y105.55-65($1.0bln)
AUD/USD: $0.7550(A$828mln), $0.7595-00(A$697mln)
AUD/NZD: N$1.0690-1.0700(A$615mln-AUD puts)
NZD/USD: $0.7100(N$853mln), $0.7375(N$502mln)
USD/CAD: C$1.2590-1.2600($760mln)
USD/CNY: Cny6.39($625mln), Cny6.43($580mln), Cny6.45($876mln)
USD/MXN: Mxn19.50($609mln), Mxn19.75($605mln), Mxn20.00($817mln), Mxn20.50($1.8bln)
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Larger Option Pipeline
EUR/USD: Feb05 $1.1990-1.2010(E988mln); Feb08 $1.2000-05(E1.1bln); Feb10 $1.1920-30(E1.2bln), $1.2300(E1.1bln)
USD/JPY: Feb05 Y103.00($1.0bln-USD puts), Y104.95-105.00($1.4bln)
AUD/USD: Feb08 $0.7650(A$1.0bln), $0.7815-30(A$1.1bln); Feb10 $0.7550(A$1.4bln)
USD/CAD: Feb09 C$1.2960($1.2bln)
USD/CNY: Feb08 Cny6.45($1.6bln); Feb09 Cny6.50($2.1bln), Cny6.55($1.2bln)
Technical & Trade Views
EURUSD Bias: Bullish above 1.20 targeting 1.24
EURUSD From a technical and trading perspective, as demand persists above 1.20 bulls will be targeting a retest of prior cycle highs en-route to a test of offers and stops above 1.24. Only a closing breach of 1.20 would concern the bullish thesis opening a move to test the equality objective at 1.19 ahead of the yearly pivot back towards 1.17
Flow reports suggest downside strong bids just below 1.2000 level with weak stops on a move through the 1.1980 area and supportive through to the 1.1900 level, Topside offers into and through the 1.2080 area continuing to the 1.2120 area before weakness appears and light weak stops open the 1.2150 area for a test, from there though topside offers start to increase into the 1.2200 level and above to limit any sudden moves
GBPUSD Bias: Bullish above 1.35 targeting 1.3830/60
GBPUSD From a technical and trading perspective, as as 1.35 supports then prices can extend higher to test interim wave 5 upside objectives to 1.3830/60 area
Flow reports suggest topside offers through the 1.3750 area and increasing on any move towards the 1.3800 level weak stops on a break through opens up a larger rise with limited stops through the 1.3850 area but opening the 1.41/1.42 over time. Downside bids light through to the 1.3650 area and stronger bids currently being tested with weak stops likely on a dip through light for the moment and stronger bids into the 1.3600 level and increasing on any move to the 1.3550 area
USDJPY Bias: Bullish above 104 targeting 105.50
USDJPY From a technical and trading perspective, as 104 acts as support look for a test of 105.50 from here watch for bearish reversal patterns to suggest a resumption of the dominant downtrend
Flow reports suggest topside offers through the 105.00-20 area with possible weak stops through the level before stronger offers start to appear in a congestive move through into the 105.60 level and after a little bit of weakness increases through to the 106.00 level with stronger stops above the 106.20-30 area. Downside bids light through to the 104.50 level with bids beginning to fill the market around the level and stronger into the 104.00-20 areas and stronger bids below the 103.60 levels.
AUDUSD Bias: Bullish above .7560 bullish targeting .8000
AUDUSD From a technical and trading perspective, as the major trendline support at .7560 now acts as support, look for target wave 5 upside objective towards .8000. Note .7800 is an interim measured move upside objective that may prompt a profit taking pullback before the uptrend resumes from.7550 trend support
Flow reports suggest downside bids light through to the 0.7560 area and bids likely to be strong through to the 0.7550 areas and increasing on any move into the 0.7500-0.7480 area with strong stops through the level and opening stronger downside potential, topside bids light through the 0.7650 area and limited build of offers around the 77 cents level sees limited stops and the market then starting to increase resistance on any move through the 0.7750 level
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High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 65% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
Past performance is not indicative of future results.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 75% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!