(27 MAY 2020)DAILY MARKET BRIEF 2:Sharp positive reversal in US dollar appetite hints at mounting stress

The European Central Bank (ECB) President Christine Lagarde’s speech about the bank’s response to the Covid-19 crisis will be closely monitored by euro traders. But the latest German court investigation on the proportionality of the ECB’s massive bond purchases should dent the bank’s influence on markets, with the looming risk that the ECB could unwillingly scale down its rescue operations to support the Eurozone economy. And this is negative for the euro’s upside potential.

The EURUSD tested, but again failed to combat the solid 1.10 offers as the US dollar firmed on fading global risk appetite. The sharp reversal in daily direction could encourage a slide toward the 1.09/1.0880 area. The single currency is expected find some minor support near the 50-day moving average (1.0880), however. Also, we do not rule out the possibility of a renewed eurp rebound toward the 1.10 mark if Lagarde convinces investors that the ECB has got the right arguments to continue its monetary policy without interruption.

In the US, the Richmond manufacturing index is expected to confirm another cataclysmic month. Yet if the data is better than the consensus of -40 (versus -53 printed a month earlier), the marginal impact on the market mood should remain limited.

Gains in Cable were capped by the 50-day moving average (1.2350) as expected. A swift move toward the USD safety will certainly pull the pound below the 1.23 mark. The first natural target for pound-bears is the 1.2160-support, if broken should pave the way toward 1.2080, the May dip.

WTI crude consolidated a touch below the $35 per barrel, yet fresh long positions lose pace with the rising US-China tensions, hinting that a downside correction could be around the corner. As we mentioned in our earlier reports, the improvement in core energy demand is key for a sustainable recovery in oil prices, and that is happening with economies getting back to work across the globe. Hence, a potential pullback in oil prices triggered by mounting US-China tensions should find support near the $32/30 area.

By Ipek Ozkardeskaya