Week Ahead: Covid-19: a ray of hope?

As markets tussle with the impact of the Covid-19 outbreak, investors around the globe are understandably worried. Last week saw mixed news on the outbreak. Italy seemed to approach the peak of the outbreak while, the picture in Spain and USA is getting worse. The question now is whether the economic recovery will be V-shaped or U-shaped.

The Fed has changed its QE program to an open-ended structure and has started to create new facilities to ease dollar and funding constraints. This is considered a successful measure as credit spreads have begun to tighten and the dollar has retreated from its highest level.

As shown in the below daily chart for the dollar index (DXY), USD has broken a major level of 99.70 after reaching 102.99, its highest level for three years. In the short term, we may see the dollar fall further to 97.00 if it does not climb to 99.70 again.

The US approved $2 trillion of fiscal support to the economy (10% of the American GDP), which helped a major rebound in the Dow Jones last week - but there is little to suggest the rally will continue higher.

On Friday, markets failed to break the resistance level and 38.2% Fib. retracement levels. This would make the index more exposed to further selling next week after a bearish signal was constructed on the close.

Moving across the Atlantic, the ECB is now can buy assets when and where it wants. This new step has increased liquidity in the credit markets and untie the bond markets. Italy was rescued from falling into a sovereign debt crisis and now ECB is likely to turn its effort to Spain next week. The EUR/USD surged last week and closed above 200-SMA, which we consider a bullish signal in the short term and. A continuation higher to 1.1250 or 1.1360 is a highly probable scenario.
EUR/USD, Daily Chart, Source: Bloomberg
It is a tough time for FTSE 100 as it plunged after The British prime minister and the health minister revealed that they have Covid-19. Moreover, Fitch downgraded UK to “- AA “with a negative outlook. There may be more fiscal support from the government heading for the economy next week.

 From Technical analysis perspective, the close on Friday is considered a sell-signal and the likelihood favors a continuation for the mid-term down trend toward 5,280 and 4,950.

FTSE 100, Daily Chart, Source: Bloomberg
BoE did not change its monetary policy in their last dry meeting as was widely expected as it just slashed its interest rates to 0.1% and introduced £ 200 billion Asset purchase program before the meeting. The central bank also intends to increase its daily purchase of bonds – GBP 4.5b per day – and will split evenly across three maturity buckets. It is clear the monthly asset purchase amount will be exhausted soon, and the bank will increase its monthly advertised plan as it is already considered low compared to its peers. The recent ample liquidity of US dollar helped GBP/USD to climb above 1.20 mark to surge further to 1.2460, the area of resistance at 1.2480/1.2550 could represent a barrier for further advance, and the pound seller could look to 1.2250/1.2180 at the pair may retreat from 61.8% Fibonacci retracement levels.

GBP/USD, Daily Chart, Source: Bloomberg
As the OPEC+ production cut will end on Wednesday, NYM WTI still under negative outlook and major selling pressure. It lost nearly 4.8% of its value on Friday, drops five weeks in row, and plunged about 65% so far this quarter. Traders bet on breaking $20 per barrel is still on the play at the foreseeable future.  The main dual factors for the recent drop are deteriorating demand because of the Covid-19 outbreak and inflating supply from the producers after the collapse in their talks last month to extend and deepen the production further. 

WTI lost 65% of its value this quarter so far:

Gold has suffered an extreme price distortion last week due to the rush of buying near term future contracts or spot bars and the shortage of the supply. XAUUSD is still well above $1600/$1,585, although this area of supports keep gold prices anchored, bullion bulls look to further advance to $1,655/$1,675 per ounce.
What to look for this week:

Source: ThinkMarkets