US Dollar, FOMC Rate Decision, US GDP Data, Coronavirus – Talking Points
- US Dollar may rise if FOMC rate decision, outlook sparks risk aversion, demand for havens
- Greenback gains could be amplified by US GDP data as economy wrestles with coronavirus
- GBP/USD appears to be forming a bearish reversal pattern known as Head and Shoulders
Absent a clear catalyst, the growth-anchored New Zealand and Australian Dollars gained along with US equity futures and crude oil. The risk-on tilt put a premium on cycle-sensitive FX assets like those outlined above while haven-linked currencies like the US Dollar fell. Australian Q1 CPI data came in better than expected, though it failed to elicit a notable reaction in AUD, most likely because it is not anticipated to materially alter the RBA’s policy stance for now.
FOMC Rate Decision, Press Briefing May Amplify US Dollar Strength
Overnight index swaps are not pricing in a rate cut from the Federal Reserve, so the uncertainty – and therefore source of volatility – may come from the press briefing by Fed Chairman Jerome Powell. If his commentary carries unexpectedly gloomy undertones regarding the outlook for growth and financial stability, it may spark a risk-off tilt in market sentiment and push the haven-linked US Dollar higher.
In an effort to calm inter-bank credit stress, monetary authorities have embarked on an unprecedented liquidity-injecting stimulus package that has brought the Fed’s balance sheet to almost $6 trillion. The most recent one undertaken by the Fed was the creation of the Municipal Liquidity Facility (MLF) which involves purchasing up to $500b of short-term notes from smaller US cities that are experiencing funding pressure.
Fed Balance Sheet Approaching $7 Trillion
Virus-Hit GDP Data May Push US Dollar Higher
Quarter-on-quarter US GDP data on an annualized basis is expected to show a 4 percent contraction, which would market the softest figure in this data set since the Great Recession in 2008. This comes as the unprecedented shelter-in-place orders – dubbed “The Great Lockdown – has crushed consumer confidence and put the world economy on course to experience the worst downturn since the Great Depression.
Total Coronavirus Cases Tops 3,000,000 With One Third in the US
Source: Johns Hopkins CSSE
If the data is worse-than-expected, that could further amplify risk aversion and worries about the outlook for growth out of the world’s largest economy. If the data is underwhelming, counterintuitively, the Greenback may rise. This is because the US Dollar is the world’s reserve currency and is used in over 80 percent of global business transactions – according to the BIS – making it the most liquid asset to trade in uncertain times.
US GDP Expected to Print Worst Figure Since 2008 Financial Meltdown
This is not an unfamiliar dynamic. In 2008, despite the Fed’s rate cuts and introduction of quantitative easing (QE), the US Dollar soared even though the source of economic and financial distress was emanating out of the US. A similar pattern occurred also in 2018 and for most of 2019 where eroding fundamentals pushed the US Dollar higher despite the Fed’s expanded balance sheet and interest rate cuts.
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GBP/USD Technical Analysis
GBP/USD appears to be forming what could be a bearish reversal pattern known as the Head and Shoulders. If the pair is unable to clear resistance marked by the first shoulder, capitulation could send GBP/USD to retest the neckline. Breaking below that with follow-through could see the pair fall until the exchange rate hits 1.1782, give or take a few pips.
GBP/USD – Daily Chart
GBP/USD chart created using TradingView
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— Written by Dimitri Zabelin, Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter