The Reserve bank of Australia held its usual meeting during the Asian session and they cut interest rates from 0.75% to 0.50%. But, there was no knee-jerk reaction lower in AUD/USD after he rate cut, mainly because traders were anticipating such a cut, due to the spread of coronavirus, which is hurting the global economy. Instead, the Aussie has retraced higher today as the sentiment has improved a little.

But, it’s not exactly turning positive either, as European stock markets are trading around the opening levels now. This morning, we also had the UK construction PMI and the Eurozone inflation reports being released. The construction sector had fallen in recession in Britain, but today’s report showed a jump for February and now it has left contraction behind, as the future of the UK becomes more clear after the elections. But, if coronavirus keeps spreading in UK, then we might see a dive into contraction again, as workers isolate themselves, but I hope that won’t be the case. Inflation moved lower in the Eurozone during February, but core inflation ticked higher, which is more important.

The European Session

• UK Construction PMI – The construction sector had fallen in contraction in the UK since early last year, which turned into recession. The decline bottomed out at 43.1 points in June and has been improving since then. But, this sector remained in recession until January, as the future of the UK was quite uncertain. But, now that we know where the UK is heading, the situation has improved and today’s PMI report showed that this sector jumped out of recession last month, coming at 52.6 points, up form 48.6 in January and beating expectations of 49 points.
• BOE’s Carney Speaking – The Bank of England chairman mark Carney was speaking on the economy and the interest rates this morning. He sounded like the BOE is going to cut rates, but the timing is not yet known. he made the following comments:
  • We will take all necessary steps to support the UK economy
  • If UK economic recovery is not sustained, BOE may need to act
  • Interest rates likely to remain low for some time
  • Low rates have helped keep the economy at equilibrium
  • We are in frequent contact with international peers, including G7, G20 and IMF
  • BOE will take all necessary steps to support UK economy, financial system
  • BOE’s role is to help UK businesses, households manage through an economic shock
  • It could prove to be a large one but will ultimately be temporary
  • Disappointed that global economy remains in a low growth, low inflation equilibrium
  • UK economy is recovering but it is still early days
• Eurozone CPI Inflation Report – Inflation has been a headache for the European Central Bank. It cooled off considerably last year, falling to 0.7%. Although, it picked up in the last few months of last year, increasing to 1.4%. Last month though, core CPI cooled off to 1.1% after a few months of increasing, bringing it closer to the 1% red line for the ECB.Today’s report was released a while ago for this month and it was a bit of a mixed one:
  • Eurozone February preliminary CPI +1.2% vs +1.2% y/y expected
  • January stood at +1.4%
  • Core CPI +1.2% vs +1.2% y/y expected
  • January core CPI +1.1%
• ECB Still Calling for Fiscal Stimulus From Eurozone Governments – The ECB governing council member, Robert Holzmann made some comments earlier today.
  • Monetary policy actions are secondary to fiscal support
  • ECB must stay vigilant, but not overreact
  • TLTROs will be under consideration next week
  • Sees no urgency to move on TLTROs

US Session

• G7 ready to Take Action? – The US Treasury released the G7 statement on its website. G7 says that they are ready to take action, including fiscal tools, where needed. Below is the statement:
• ECB’s Kazimir Speaking – The ECB member Kazimir, who is the Slovak central banker, commented earlier today about the G7. It didn’t sound like he’s in any rush to act. There is talk of a lending program for SMEs impacted by the drop in activity. I think he’s referring to QE and rate cuts, not something like that. Below is the tweeet:

“G7 coordination, aimed to shield the global economy, is much appreciated. Important for ECB to remain alert, monitor situation. There’s no imminent need to act, but we’re ready to step in when and where necessary. Panic & overreaction could cost us a lot.”

• Coronavirus Update –
  

  Country, Other	Total Cases	New Cases	Total Deaths	New Deaths	Active Cases	Total Recovered	Serious, Critical
  China	80,152	+126	2,945	+33	29,810	47,397	6,806
  S. Korea	5,186	+851	34	+6	5,118	34	27
  Iran	2,336	+835	77	+11	1,824	435
  Italy	2,036		52		1,835	149	166
  Diamond Princess	706		6		600	100	36
  Japan	283	+9	6		234	43	23
  France	204	+13	4	+1	188	12	8
  Germany	188	+23			172	16	2
  Spain	153	+33			151	2	3
  Singapore	110	+2			32	78	6
  USA	103	+3	6		88	9	7
  Hong Kong	101	+1	2		62	37	6
  Kuwait	56				56
  U.K.	51	+12			43	8
  Bahrain	49				49
  Switzerland	47	+17			45	2
  Thailand	43		1		12	30	1
  Taiwan	42	+1	1		29	12	1
  Australia	39	+6	1		23	15	1
  Malaysia	36	+7			14	22
  Norway	32	+7			32
  Canada	27				20	7
  Iraq	26				26
  Netherlands	24	+6			24		1
  Sweden	24	+9			24
  Austria	21	+3			21

Trades in Sight

Bearish AUD/USD

• The main trend is bearish
• The retrace higher is complete on H4 chart
• The 20 SMA provided resistance
• The sentiment remains negative

The 20 SMA is stopping the climb for AUD/USD

AUD/USD has been bearish for about two years, when the FED was in the middle of a tightening cycle. Although just like in NZD/USD, we saw a retrace higher in the last few months of 2019, as the sentiment improved on prospects of a partial trade deal between US and China. But, the good times ended with the old year and this year the sentiment turned negative right away, as tensions in the Middle East grew. Then came coronavirus, which has turned the sentiment massively bearish and the data released from China over the weekend showed that the economy has fallen deep in contraction due to the shutdown.

This will reduce the demand for raw materials and other goods from Australia, so the AUD should remain bearish. But, the odds of FED cutting interest rates this month have gone up to 100% and the USD has weakened in recent sessions, mainly shown in EUR/USD which has climbed nearly 4 cents since last week. As a result, AUD/USD has retraced higher in the last few sessions, but the retrace seems complete now on the H4 time-frame chart. The price has found resistance at the 20 SMA (grey) which has done this job before and it is also overbought. Buyers seem exhausted now and a morning star candlestick formed below the 20 SMA, which is a reversing signal. We decided to sell the retrace, so now we are short on AUD/USD.

In Conclusion

Stock markets again opened with bearish gap lower this Tuesday morning, but they reversed higher as the European session progressed. Although, I think that the decline will resume again, as coronavirus spreads across the globe. The FED has just delivered a surprise rate cut now and the USD is tumbling lower now.