Fed Budget Deficit Expansion
- US treasury reported on 13 July that the budget deficit has reached an all-time high of $864 billion in June, primarily due to stimulus programs for small businesses. Current fiscal and monetary policies coupled with COVID-19 cases continuing to surge may indicate weakness in the dollar.
China exceeds GDP forecasts in Q2 2020
- China released its GDP data for Q2 of 2020 on 16 July – which grew 3.2% more than the same quarter last year. Industrial production rose by 4.8% while unemployment dropped from 5.9 to 5.7%. While these figures indicate strong economic recovery, current consumer confidence is still low with retail sales continuing to contract by 1.8%.
EU Brussels Summit
EU leaders have gathered to discuss the $750B pandemic recovery fund and the new 7-year budget on 17 July. No census on the outcome could negatively impact the Euro with investors hoping for stimulus packages.
What is driving the USD down? Economic Recovery and a potential vaccine vs Signs of a Faltering Recovery
Since the beginning of July, the US dollar index has been trending downwards, while the S&P 500 has been rallying upwards. In these uncertain times, the USD has been viewed as a safe-haven currency, due to its role as the world’s reserve currency and its use in international business transactions. An interesting trend to note is the inverse relationship between the US dollar index and the S&P 500.
There are now over 3.6 million confirmed cases in the U.S., along with an increasing rate in the number of infections, which has led to the shutdowns in multiple states across the country. But stocks continue to rally. One may speculate that recent news about the development of vaccines from companies such as Moderna, Pfizer and BioNTech have supported the narrative about the U.S. economy recovering, but the lack of a significant spike in the market suggests these outcomes have already been priced in.
Interestingly, the U.S.’s recent move to treat Hong Kong as mainland China has had little to no impact on the markets – usually, such geopolitical tension would boost the US dollar. While optimistic sentiments continue to boost stocks, it is important to pay attention to economic indicators, such as manufacturing indexes, jobless claims, and the performance of large market-cap firms, to determine whether the narrative will shift or not.
Despite the golden cross (the 50-day moving average crossing over and above the 200-day moving average) 2 weeks ago, the pair is bounded by the 0.707 resistance level – a significant resistance level given it being the highest the pair has been over the past year. Although the golden cross usually indicates bullish momentum, given such a significant resistance level in the absence of any significant fundamental news to sway sentiment, one may expect the pair to test the 0.707 resistance level again over the next week. A key narrative to keep in mind is that of a global economic recovery over the next few months.