Forex Market Outlook: Traders await US Macroeconomic Data Releases

During the upcoming trading week, traders and investors will focus on the release of key macroeconomic data from the United States economy, and a key interest rate decisions from the FOMC. What else can traders expect this week’s forex market outlook?

July 27 2020 | AxiTrader – Risk had a pullback across the board on Friday after a further escalation of US-China tensions. The latest developments likely are not overly significant, but given it was Friday and had been until now a good month for risk, it’s probably time for some good old-fashioned profit-taking.

Stocks market outlook

It’s been a volatile week for Growth/Nasdaq as earnings expectations proved to be high; just take a look at AMZN, which has yet to report. This is the critical market bellwether after making highs of 3337 on July 13 to now drawing closer to 3000. It’s come off sharply over the last couple of weeks after substantial gains as the US tech sector may find itself a  pawn in Cold War 2.

So, what put a wrench to the recent rally? I think a combination of factors: US-China tensions; an inability for many stocks to run higher on good numbers; more signs that the economic recovery is stalling and that the Covid-19 impact will be felt for a long time; election risk; crowded positioning and concentrated stock leadership. And that’s just to name a few.

Next week we could see a strong trend develop with the EU recovery fund acting as the springboard for a leveraged play on European stocks. This view is further supported by Friday’s robust EU flash PMIs which expectedly pushed the EURUSD higher into the weekend as the US dollar weaker narrative looks reasonably well entrenched.

The UK PMIs were also strong. The flash manufacturing PMI for July came in at 53.6, better than the forecast for 52.0, and 50.1 in June. The services number was 56.6, also better than the estimate for 51.5, and after 47.1. So, the World vs. the US growth divergence trade may be on the verge of finally fulfilling the market’s prophecy.

Gold is still performing very well, pushing above the $1,900 level and now almost up 25% YTD. New lows in the US yields ahead of the FOMC next week seem to be the driver for now. Still, this week’s shift to a risk-off mood, stemming from US-China tensions, has caught the imagination of more than just strategic gold investors as retail demand picked up significantly towards the tail end of the week en masse.

Crude didn’t quite make $45 this week before selling off after the miss on the US claims data. But the market’s relatively nonplussed take on the job numbers suggests traders continue to lean on the prospect of a weaker US dollar as yet another price plank. In contrast, the near-term upside will likely be limited until the Sun Belt epi curve flattens. At the same time, the market’s primary thesis on what ultimately matters for growth assets is whether a US-China geopolitical escalation morph into economic beatdown seems to be echoed favorably in oil markets.

Oil trading is pretty tame these days after getting relegated to a relative value play. The market seems to be finding a sweet spot while hashing out a near term equilibria in the upper part of the recent range.

AxiTrader economic calendar: the week ahead

As we move into the summer holidays, there’ll be several events to keep market participants hopping next week.

The main highlights will likely be the Fed’s decision and forward guidance on Wednesday, along with a raft of earnings releases which includes market leadership heavyweights Amazon, Apple, Alphabet, and Facebook. Data releases will also draw a fair amount of attention, particularly given the Q2 GDP releases in the US and the Euro area.

Both are likely to show some of the most significant quarterly contractions in decades; while the gloom is entirely expected,  it will nonetheless make for horrible eye candy. And, finally, informal talks will continue between the UK and EU on their future relationship.

Recent communications from the Fed have made it clear that the FOMC will soon pivot away from stabilization towards accommodation, which is currently getting reflected in the weaker US dollar and higher gold prices.

The Q2 GDP releases will be the primary data highlight next week. For markets, these may not be as telling – at least relative to the more high-frequency data releases since they’re already nearly a month old – but they will nevertheless show the scale of the declines in output.

The problem with data and why markets are ignoring it is that there is no consensus, not to mention the estimates are far too broad. Expectations are typically relevant, but traders opt to ignore the numbers for the time being due to the wild variability in the data. GDP and employment indicators show extraordinarily little in the way of a generally agreed-upon consensus figure. Indeed, this makes “beats” and “misses “less meaningful.

And, finally, the market will continue to keep an eye on the escalating US-China war of words and small actions as the US bully boys set sights on China while taking a rough and tumble approach.

Gold markets

Gold’s rise to USD1,900/oz hasn’t raised too many eyebrows as it’s progressed in a well-ordered fashion and is entirely explained by fundamental drivers, not gold fever. And the rally is far from over as the dominos fall into place for a test of the $2,000 level. Gold’s investment flows remain driven first by ETF assets (+30 mm troy ozyoy) and second by central banks’ data reported through May (+14 mm troy ozyoy).

Speculative positioning has significantly lagged the rally since the March trough, however, there’s been a considerable buy in this week on retail platforms that could be a reason for the surge in demand since Wednesday’s China retail open.

But cutting between the line of the overly repetitive “stimulus is suitable for gold” narrative, it’s striking to see the extent to which gold has tracked real yields in the last 18 months; gold has virtually been tethered to the hip.

The question of whether gold can keep rallying is one of whether real yields can keep falling.

Forex market outlook

Even though there was a palatable US-China friction-inspired risk-off tone, US dollar demand was barely perceptible as G10 currencies traded in relatively tight ranges before recovering into Friday’s close, triggered by the stronger Euro.

The market continues to add Euro risk, given the mounting indications of slowing activity in the US; the better European data could serve as another argument for regional equity rotation, in turn further supporting the Euro in the short and medium-term.

For now, I’m shifting the upper end of the take profit goal post to 1.200 (from 1.1700) for first-level profit-taking from my documented 1.1240 buy call in the lead up the EU summit.

After fading the move lower on both AUD and CNH, I expect both currencies to flourish on the rebound next week. The stout global economic recovery is endearing capital to find new opportunities outside the US. Cash on the sidelines is walking a road less traveled that’s now paved by broad-based US dollar weakness. The highly demarcated global recovery as countries emerges from the Covid-19 crisis benefit the asset markets of those economies that push the envelope for private investment-led improvements or export commodities (think CNH and AUD).

This dynamic is conditional on China promoting credit-driven investment growth, especially if private consumption disappoints. US political discord over a new Covid-19 relief bill and deteriorating US-China relations are the key risks to this view.

A slew of banks upgraded their growth forecast for China, which should trigger more foreign capital inflows and strengthen the Yuan as the Chinese stock market could flourish.

My bullish China view is running counter to the August jitter narrative. Two months of the year have typically been awful for emerging markets and one of them is August; over the past ten years, on average, it’s been the second-worst month for EM currencies.

Oil markets 

There are no prominent views on the oil market as the complex is now being designated a relative value play, which makes things sleepy as range trade mentality reigns supreme.

Invariably something will shake the trees, but with the US dollar expected to weaken precipitously in the coming weeks, long oil traders will continue to support dips. Expressing US dollar weakness through the oil market could be a profitable venture, provided we get some definitive follow-through on a vaccine or a bend lower in the Covid curve in the US Sun Belt states.


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