Asian stock indices are losing from 1 to 2% on Tuesday morning trading, following the US indices, which declined noticeably after a sharp drop in oil prices on Monday evening. There is no doubt that European sites will open with a strong decline, and this will not be prevented even by encouraging news on slowing the rate of spread of the coronavirus in most countries.
The main reason for the oil drop is the consumption of oil storage capacities amid a record decline in demand. Since WTI futures are deliverable, those who own the contract should have a place to store oil, so they have a dilemma – either to prolong the contract until June or close it. However, Brent has a different situation - the May contracts have already been repaid, so the decrease is much less. The fact that the current situation in the oil market is unlikely to lead to a collapse in commodity indices is also evidenced by the fact that the LMEX industrial metals index at trading in London has not changed, that is, the WTI light oil storm is local in nature.
As expected, the market reacted negatively. There was an increase in demand for gold and bonds, but both the yen and the franc were virtually without movement, that is, the panic is local in nature and will not last long. The Chicago Federal Reserve Index in March declined to -4.19p, while the real sector of the economy continues to fall.
Positive news on the coronavirus will be published today, so growth in demand for risky assets can be expected. It will take some more time for a low base to form, starting from which markets will resume growth.
EUR/USD
The estimated fair price is still kept above the spot price. This is understandable - the CFTC report showed that the net long position on the euro increased again last week, reaching $ 10.841 billion. In the medium and especially long-term assessment of the prospects for the euro, we must proceed from the fact that speculators see a strong potential for the growth of the euro, especially that the ECB repurchase program is significantly inferior in volume to the Fed. At the same time, the situation in the short-term does not look in favor of the euro, since the direction of the estimated price is directed downwards, that is, there is a tendency to decrease it, which strengthens the grounds for lowering EUR/USD.
The approach of the US election is a factor that is directed against the strengthening of the euro. And since the US markets must attract foreign investors, the Trump government will take steps to support the stock market, and therefore to attract capital, which will support the dollar.
GBP/USD
According to the CFTC report, the long position on the pound declined by 0.103 billion. It's not a big reduction, but the trend is negative. Accordingly, the settlement price also goes down, which reduces the chances of the pound resuming growth.
The positions of the pound look vulnerable. In the UK, there is no strategy to open the economy after the pandemic, while the rate of spread of coronavirus has increased significantly. Uncertainty also remains with regard to Brexit, as trade negotiations with the EU are still far from resolving as in January.
The Bank of England rate is at the lowest effective level of 0.1%. Further decline is unlikely and BoE's efforts are aimed at launching direct financing mechanisms for corporations. Moreover, the pound receives additional vulnerability because the UK has a large current account deficit.
Today, a report on the labor market will be published, but it will not have a strong impact because it will include data only for February, but for one position - applications for unemployment benefits - March data will be published. An inflation report for March will be published on Wednesday, surprises are possible, as consumer demand fell recordly in March, pressure on the pound may increase on Wednesday.
The GBP/USD pair managed to recover after the period of panic sales in the second half of March ended, but the risks are rising again, and the pound is under pressure. The pound went below the support 1.2440/60, which is now a resistance. As a result, the most likely scenario for the current week is a decline to support 1.2150.
The material has been provided by InstaForex Company - www.instaforex.com