Analysts at Citibank point out  Sentiment remains bullish in sterling with the combination of the most recent (positive) UK COVID developments, a possible Brexit announcement this week (or next) and a less negative rate impetus from the Bank of England together with more fiscal stimulus from the UK government. 

Key Quotes:

“There’s no doubt that GBP is cheap based on traditional PPP, which sits around 15% below its long term average. So arguably, despite the fact that the UK has lagged the G10 complex in terms of economic momentum throughout most of the year, the currency has been reasonably supported by its cheap valuation. Going forward, widespread distribution of a vaccine, and an agreement on a Brexit deal can support GBP. A Global economic recovery in 2021 as a result of a vaccine could see the UK begin to catchup. This also reduces the probability of the MPC moving policy rates into negative territory.”

“GBPUSD found support at 100dMA. The pair may challenge 1.3482, with support at 1.2982.”

  • The S&P 500 has eroded all of its pre-market gains amid choppy post-strong US PMI data trade.
  • As markets weigh up whether strong data might deter the Fed from acting, the S&P 500 trades within recent ranges.

US equity markets have been choppy in recent trade, with the S&P 500 initially rallying in wake of the US cash open at 14:30GMT, to then see a further boost to its highest levels since last Wednesday in wake of strong data, only for markets to than change their minds and send the index back towards last week’s lows in the 3550s and back into the red.

S&P 500 buffeted by vaccine optimism, US/China tensions and differing views on strong US data

S&P 500 futures spent the majority of pre-US market trade in the green, boosted primarily by an increasingly optimistic feel regarding the prospect for a global economic recovery in 2021 on the back of further good vaccine news.

AstraZeneca released an update on Monday, announcing that their vaccine has an average efficacy of 70% (a fair bit lower than Pfizer and Moderna’s vaccine), although one regiment of vaccine candidates, those who received a half dose followed by a second full dose one month later, saw average efficacy of 90%.

Importantly, storage conditions are more favourable than Pfizer’s vaccine; this vaccine can be stored at normal refrigerator conditions for at least six months (vs Pfizer’s vaccine, which needs to be stored at -70 degrees Celsius and Moderna’s which can be stored in refridgerator temperature for only one month).

S&P 500 futures took a small knock prior to the cash open on the news that the Trump administration is pushing for new hard-line measures against China to prevent them from employing economic coercion.

According to the Senior officials, they want to create an informal alliance of Western nations to jointly retaliate when China uses its trading power to coerce countries and was motivated by the economic pressure that China has been putting on Australia after the country called for an independent investigation into the origins of the Covid-19 pandemic.

However, S&P 500 futures managed to hold onto reasonable gains on the day heading into the not normally widely followed Markit PMI release at 14:45GMT.

Monday’s US Markit PMI release was different, however, triggering a very large market reaction, particularly in FX markets; given how strong the data itself was, as well as the fact that it showed US inflation starting to shoot up in November, USD has seen a stunning rally, with the Dollar Index jumping from around 92.00 to above 92.50.

Over the same period of time, the S&P 500 has swung between initial post-data gains (given the strong data boosting optimism about future earnings) to trading back to flat on the day.

Given the reaction in USD, it seems as though markets are taking the view that strong data and the prospect of higher than previously anticipated inflation heading into 2021 might set the scene for a less accommodative than hoped for Federal Reserve, something which is being taken as a negative stock market valuation.

S&P 500 continues to trade within recent intra-day ranges

The S&P 500 continues to trade within a roughly 3543-3583 range. Should the bears prevail and send the index below last Thursday and Friday’s lows around 3543, the door would be opened for a retest of the 3510-3520 area, which acted as significant support/resistance from the 5 to 11 November. Conversely, should the bull prevail and push the S&P 500 higher, resistance at the psychological 3600 mark would be important, as would the beginning of last week’s highs around 3620-3630.

S&P 500 futures four-hour chart

S&P 500 futures

  • USD/CAD gained traction and rose above 1.3100 during American session.
  • Crude oil’s upbeat performance helps CAD limit its losses.
  • Economic activity in US’ private sector continued to expand in November.

After dropping to 1.3050 area during the European trading hours, the USD/CAD pair reversed its direction and climbed to a daily high of 1.3107. As of writing, the pair was trading at 1.3098, where it was virtually unchanged on a daily basis.

Earlier in the day, rising crude oil prices helped the commodity-sensitive CAD gather strength against its rivals. Supported by the optimism that coronavirus vaccines will lead to a steady recovery in energy demand, the barrel of West Texas Intermediate (WTI) rose to its highest level in more than two months at $43.33. As of writing, the WTI was trading near $43, gaining 1.4% on the day.

DXY advances toward 93 after PMI data

On the other hand, the renewed USD strength allowed USD/CAD to push higher despite crude oil’s upbeat performance.

After the data published by the IHS Markit showed that the business activity in both the manufacturing and the service sector in the US continued to expand at an impressive pace in November, the greenback started to outperform its rivals.

US: Markit Manufacturing PMI improves to 56.7 in November vs. 53 expected.

Supported by a 3% increase in the 10-year US Treasury bond yield, the US Dollar Index (DXY) shot higher and touched a daily high of 92.80 after remaining stuck around 92 for the majority of the day.

Later in the session, Toni Gravelle, Deputy Governor of the Bank of Canada (BoC), and San Francisco Federal Reserve President Mary Daly will be delivering speeches.

Technical levels to watch for

 

  • US dollar soars across the board after US economic data.
  • EUR/USD drops from near key medium-term resistance to weekly lows.

The EUR/USD fell sharply almost a hundred pips in a few minutes from the 1.1900 area to 1.1799, hitting the lowest level since November 12. It then rebounded modestly and as of writing, it trades at 1.1815, 40 pips lower than Friday’s close.

The move lower took place on the back of a rally of the US dollar across the board following the release of the US Markit PMI preliminary report for November. The index showed an unexpected increase to the highest level in years.

The greenback started to gain momentum, making a dramatic reversal. The DXY stands now near weekly tops, after testing the 92.00 area hours ago. US yields hit fresh highs, helping the dollar.

From a technical perspective, the EUR/USD looks vulnerable and a consolidation under 1.1815 would set the scenario to more weakness. The rejection from levels above 1.1900, the upper limit of a wide range, could accelerate. A daily close under 1.1780 (20-day moving average) could target 1.1700.

Technical levels

 

“There is a risk of scarring effects on demand due to increased risk aversion,” Bank of England (BoE) policymaker Michael Saunders told the Treasury Select Committee on Monday, as reported by Reuters.

Additional takeaways

“I am worried about pandemic hangover even after vaccine rolled out.”

“There has been a big rise in corporate debt, risk of a further rise in unemployment.”

“I expect these scarring effects will weigh on the UK economy for some time.”

Market reaction

The GBP/USD pair showed little to no reaction to these comments and was last seen trading flat on the day at 1.3282.

Commenting on AstraZeneca’s announcement that its COVID-19 vaccine candidate was up to 90% effective, “this is the most hopeful advance of all,” said British Prime Minister Boris Johnson on Monday, as reported by Reuters.

“They show this is not a pandemic without an end,” Johnson added. “We have more than enough for the UK, crown dependencies and overseas territories.”

Market reaction

These comments don’t seem to be having an impact on the British pound’s performance against its rivals. As of writing, the GBP/USD pair was virtually unchanged on the day at 1.3283.

 

  • GBP/USD has seen a sharp reversal back below 1.3300 in recent trade amid a resurgent USD dollar on strong PMI data.
  • But GBP/USD is still the best performing USD major pair on the day, buoyed by Brexit hopes as well as an incoming end to the national lockdown.
  • The pair managed a bullish breakout of a long-term upwards trend channel earlier in the session, though these gains have now been eroded.

GBP/USD is sharply off highs of just shy of the 1.3400 mark in recent trade, amid a resurgent US dollar and trades back below 1.3300. Though the pair still the best performing USD major pairing on the day, it now trades with losses of just over 10 pips or 0.1%.

Resurgent buck

The US dollar has seen extensive upside in recent trade, triggered by much stronger than anticipated preliminary US Markit PMI data for November. Manufacturing PMI unexpectedly jumped to 56.7 from 53.4, versus expectations for a slightly drop to 53.0. Meanwhile, services PMI also unexpectedly jumped to 57.7 from 56.9, versus expectations for a drop to 55.0. That put manufacturing PMI at its highest level since September 2014 and services PMI at its highest level since April 2015. “The November PMI surveys provide the first post-election snapshot of the US economy, and makes for very encouraging reading”, said Chris Williamson, Chief Business Economist at IHS Markit.

Note that it is unusual for IHS Markit PMI’s to trigger such a large reaction, but this report might have triggered such a reaction as it contained evidence of a coming uptick in inflation; “the surge in demand and hiring has pushed prices and wages higher. Average selling prices for goods and services rose at the fastest rate yet recorded by the survey, with shortages of supplies also more widespread than at any time previously reported” commented IHS Markit’s Williamson.

Hints of coming inflation could be giving the USD bulls might hope that Monday’s data foreshadows a coming rise in inflation that might lead to the Fed raising interest rates sooner than currently expected by most market participants, hence the large positive USD reaction.

Elsewhere, other factors that might be working in USD’s favour are recent reports that the Trump administration is pushing for new hard-line measures against China to prevent them from employing economic coercion. USD typically does well from signs of increased global trade tension.

But GBP still the G10 outperformer

Only GBP and CAD continue to trade in the green vs USD amid its recent resurgence. A few domestic factors are helping prop up GBP;

1) Brexit Hopes – Sky News reported over the weekend that 95% of the Brexit deal is complete (similar to reports we got last week). Moreover, the Telegraph reported that UK PM Johnson is set to reach out to EU Commission President von der Leyen some time this week in a “final push” for a deal. Though the outstanding issues of fisheries, state aid and governance remain unresolved, it sounds as though a deal is there for the taking and, at this point, failure to get a deal would constitute a catastrophic failure on both sides of the English Channel – that is the markets seem to be taking the weekend news this morning. Any call that does go down between Johnson and von der Leyen this week could be crucial in determining whether the two sides are able to clinch a deal this week. Brexit will continue to be the most important factor to consider for GBP traders this week.

2) Lockdown Ending – UK PM Johnson just addressed parliament and outlined that the UK will return to the tiered system when the national lockdown ends on 2 December. With nations in Europe seemingly more reluctant (i.e. France) to ease lockdowns that the UK, the UK’s economy might outperform some of its neighbours in the final month of the year, which could be helping GBP also today.

3) Government Spending – On Wednesday, UK Chancellor of the Exchequer Rishi Sunak will announce a new one-year spending review, which most think is likely to involve one final borrowing splurge as the economy continues to grapple with the fallout from the virus. Over the weekend, Sunak spoke about how there would be no austerity yet (austerity typically being a short-term negative for the economy), so this could also have supported GBP a little on Monday.

4) Early vaccine access – Finally, it looks as though the UK is going to have better access to its homegrown AstraZeneca vaccine than some of its neighbouring countries, meaning the country might be able to achieve herd immunity a little faster and therefore perform better in 2021. Moreover, UK authorities might approve Pfizer’s vaccine as early as this week, meaning mass vaccinations can start as early as December. That would make it one of the first Western developed countries to start mass vaccinations.

GBP/USD slumps back beneath support at 1.3313

Having surged nearly as high as the 1.3400 mark on Monday and broken above a long-term uptrend resistance (linking the 16 September, 21 October and 18 November highs), the entire move has now reversed. That means GBP/USD is now back within its former long-term upwards trend channel, bound by the aforementioned uptrend resistance, and bound to the downside by an uptrend linking the 23 and 24 September and late-October/early-November lows.

The pair has also reversed back below a significant area of support in the 1.3313-1.3320 region (the 4 September, 11 November and 18 November highs).

In terms of what is next for the cross then, obviously much depends on 1) whether this recent bout of USD strength can last and 2) whether the EU and UK can clinch a Brexit deal in the very near future. If the answer to the first question is yes and the second no, GBP/USD could be looking at a retest of 12 November lows and its 21-day moving average at just above 1.3100, and even the lower bounds of the pair’s long-term upwards trend channel, which would likely come into play around 1.3040.

If the answer to the first question is no and the second yes, then this might turn out to be more of a temporary set-back for GBP/USD, which might soon be testing Monday’s highs just shy of 1.3400 and perhaps even eyeing a test of year-to-date highs at 1.3483.

Gold has tumbled down as investors are rushing to the US dollar – not as a safety trade – but rather as a response to upbeat US economic figures. Markit’s Purchasing Managers’ Indexes have beat estimates, showing the resilience of the world’s largest economy. 

The precious metal lost ground as the figures lower the chances for new monetary and fiscal stimulus. 

How is XAU/USD positioned on the technical charts?

The Technical Confluences Indicator is showing that gold has some support at $1,828, which is where the Pivot Point one-week Support 2 hits the price. 

Further down, a strong barrier is $1,817, where another pivot point awaits, the one-month Support 2. 

Looking up, some resistance is at $1,844, which is the convergence of the Simple Moving Average 5-15m, the previous 1h-high, and the PP one-day Support 3. 

It is followed by robust resistance at $1,848, which is a juncture including the Bollinger Band 4h-Lower, the Fibonacci 161.8% one-day, and the PP one-month Support 1. 

An even stronger cap is at $1,852, where the previous weekly low and the PP one-day S2 meet up.

Key XAU/USD resistances and supports

Confluence Detector

The Confluence Detector finds exciting opportunities using Technical Confluences. The TC is a tool to locate and point out those price levels where there is a congestion of indicators, moving averages, Fibonacci levels, Pivot Points, etc. Knowing where these congestion points are located is very useful for the trader, and can be used as a basis for different strategies.

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  • Markit Manufacturing PMI continued to edge higher in November.
  • Business activity in the service sector expanded at an impressive pace.
  • US Dollar Index recovered from daily lows on the upbeat PMI data.

The IHS Markit’s Manufacturing Purchasing Managers’ Index (PMI) for the US edged higher to 56.7 in November from 53.4 in October to show that the economic activity in the manufacturing sector continued to expand at a robust pace. This reading beat the market expectation of 53 by a wide margin.

Furthermore, the Services PMI rose to 57.7 from 56.9 and surpassed the analysts’ estimate of 55.3.

Commenting on the report, “the November PMI surveys provide the first postelection snapshot of the US economy and makes for very encouraging reading, though stronger economic growth is quite literally coming at a price,” said Chris Williamson, Chief Business Economist at IHS Markit.

“Expectations about the year ahead have surged to the most optimistic for over six years,” Williamson further noted. “Reflecting the combination of a post-election lift to confidence and encouraging news that vaccines may allow a return to more normal business conditions in the not too distant future.”

Market reaction

The US Dollar Index rebounded from daily lows after the upbeat report and was last seen losing 0.15% on the day at 92.22.