Fed Stays Dovish, Central Bank Torch Passed to the ECB

Risk appetite remained supported yesterday, aided by reports that Gilead’s drug proved effective in helping people to recover more quickly from the coronavirus, as well as by a Fed ready to do more in order to support the wounded US economy. As for today, the central bank torch will be passed to the ECB and it would be interesting to see whether this Bank will proceed with more easing measures.

Gilead’s Drug and a Dovish Fed Keep Sentiment Supported

The dollar continued trading lower against most of the other G10 currencies on Wednesday and during the Asian morning Thursday. It gained slightly only versus CHF and GBP, while it was found virtually unchanged against JPY. The main gainers were NZD, NOK, CAD and AUD in that order.

The strengthening of the commodity-linked currencies and the relative weakness of the safe havens suggest that investors’ morale continued to be supported. Indeed, turning our gaze to the equity world, we see that major EU and US indices were a sea of green, with the positive sentiment rolling into the Asian session today. Japan’s Nikkei 225 and China’s Shanghai Composite gained 2.14% and 1.31% respectively.

What added to the optimism may have been reports that the antiviral drug Remdesivir developed by Gilead Sciences Inc. proved effective in helping people infected by the coronavirus to recover more quickly. A dovish Fed may have also helped market sentiment. The Committee kept interest rates unchanged at the 0-0.25% range, and hinted that more stimulus may be delivered if judged necessary. “We will continue to use powers proactively until we’re confident that the US is solidly on the road to recovery”, Fed Chair Powell noted. He also added that economic activity will likely drop at an “unprecedented pace” in Q2, which suggests that they are more likely to act again than not.

Remember in the past, we noted that monetary and fiscal stimulus may not be enough to support a long-lasting recovery in the broader market sentiment. Back then, we noted that a vaccine was needed to make us more confident on that front. Now, the combination of simulative measures and the prospect of a vaccine being ready for distribution soon make us more trustful over further recovery in equities and risk-linked assets. With that in mind, we would expect the dollar and other safe havens, like bonds and the yen, to stay on the back foot. That said, there are still risks to that view. If governments around the globe lift the “stay at home” measures too quickly, the coronavirus may start spreading at an exponential pace again, which will take us back to square one.

USD/CAD – Technical Outlook

Looking at the technical picture of USD/CAD, we can see that it drifted all the way back to the key support zone, at 1.3855, which marks the current lowest point of April. Overall, the pair still remains in a wide range, roughly between the 1.3855 and 1.4265 levels, and as mentioned above, the rate is very close to the lower bound of that range. For now, we will stay neutral, but if the rate slides below the 1.3855 hurdle, this may change the near-term outlook to a more negative one.

A drop below the 1.3855 hurdle would confirm a forthcoming lower low and more sellers may join in. USD/CAD could then travel to the 1.3782 obstacle, a break of which may clear the path to the next possible support area, at 1.3707. That area marks the low of March 12^th.

Alternatively, if the rate rises, breaks a short-term downside resistance line taken from the high of April 24^th, and then pushes above the 1.4006 barrier, which is an intraday swing high of April 28^th, this could attract a few extra bulls into the field. Such a move may help lift USD/CAD higher within the aforementioned range, where the next pit-stop could be near the 1.4073 obstacle, or even near the 1.4120 zone, marked by the highs of April 28^th and 26^th respectively. Initially, the rate might stall around there, but if the buyers are still feeling slightly more confident, another uprise may drag the pair to the 1.4198 level, marked by the high of April 23^rd.

Will the ECB Announce More Stimulus Measures?

As for today, the central bank torch will be passed to the ECB. Last Thursday, preliminary data revealed that the Euro-area manufacturing PMI fell to 33.6 from 44.5, hitting its lowest since February 2009, while the services index fell to 11.7, its lowest ever, dragging the composite PMI down to 13.5 from 29.7.

Despite recent signs that the pandemic may be leveling off, these data suggest that Eurozone’s economic activity continued to deteriorate at the beginning of the second quarter of the year and it remains to be seen whether this, combined with a potential slowdown in inflation ahead of the decision, will prompt the ECB to expand even further its stimulus efforts. Just for the record, a couple of weeks ago, President Christine Lagarde said that she and her colleagues are committed to doing everything within their mandate to fight the crisis.

EUR/SEK – Technical Outlook

EUR/SEK fell heavily in the first half of this week, but found support near the 10.680 hurdle. The pair did try to recover somewhat yesterday, however, this morning we are seeing a different picture, where the rate is getting close to that above-mentioned support area again. For now, we will take a somewhat bearish approach and wait for a confirmation break below that support zone.

Eventually, if we see a drop below the 10.680 hurdle, this will confirm a forthcoming lower low and may clear the way for further declines. The rate might then drift to the 10.630 obstacle, marked by the low of March 9^th, where EUS/SEK could receive a hold-up. The pair could rebound slightly, but if it struggles to get back above the 10.680 territory, this may lead to another decline. If this time EUR/SEK overcomes the 10.630 area, the next support level could be at 10.571, marked by the low of March 6^th.

In order to examine extensions to the upside, we will wait until we see a break of a short-term tentative downside resistance line taken from the high of April 22^nd and a push above the 10.830 barrier, marked near the lows of April 24^th and 27^th. If such a move occurs, the pair would be placed back inside the previous range, marked roughly between the 10.830 and 10.975 levels. The bulls could lift EUR/SEK higher within that range, initially aiming for the 10.900 obstacle, a break of which could clear the path to the 10.975 level, which also marks the high of April 21^st.

As for the Rest of Today’s Events

During the European day, Eurozone’s preliminary CPIs for April, and the bloc’s 1st estimate of Q1 GDP are due to be released, just a few hours before the ECB decision. Both the headline and core CPI rates are expected to have tumbled to +0.1% yoy and +0.7% yoy from +0.7% and +1.0% respectively, while the GDP data are anticipated to show that the Euro-area economy has shrank 3.2% qoq after expanding only 0.1% qoq in the last three months of 2019. Taking into account the fast spreading of the coronavirus in Europe during the last month of the quarter, a contracting economy is nothing but a given for the financial community. Therefore, we believe that EUR-traders may focus more on the ECB’s response to the damages caused by the pandemic rather than the data itself.

From the US, we get the initial jobless claims for last week and the forecast points to another 3.5mn increase, following the 4.43mn surge the week before. Personal income and spending for March, alongside the yoy core PCE rate for the month are also due to be released. Both income and spending are forecast to have fallen 1.5% mom and 5.0% mom, after rising 0.6% and 0.2% respectively, while the core PCE rate is anticipated to have slid to +1.6% yoy from +1.8%.

From Canada, we have the monthly GDP for February, with the forecast suggesting a 0.1% mom growth, the same as in January.

As for tonight, during the Asian morning Friday, Japan’s Tokyo CPIs are due to be released, with the core rate expected to have slid to +0.1% yoy from +0.4%. No forecast is available for the headline rate.

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