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Dovish Fed weakens the US dollar further, US and German Q2 GDP up next

Dovish Fed weakens the US dollar further, US and German Q2 GDP up next

European stock markets finished yesterday’s session cautiously flat ahead of last nights Fed decision, which in the end saw US policymakers also signal their determination to keep policy loose well into 2021.

While the decision to keep rates unchanged was not unexpected, the Fed also went further in announcing that it would be extending its central bank and US dollar repo and swap lines until the end of March next year, as a precautionary measure to ensure the smooth functioning of financial markets. This helped weaken the US dollar further, sending it to new two year low against the euro, while gold prices set a new record close.

The Fed’s decision on this also appeared to be an acknowledgment that current events are likely to remain largely out of their hands, and dependent not only on the overall course of the virus, but also on any further fiscal action from US politicians, a factor which Fed chair Jay Powell made reference to in his post meeting press conference.

Powell’s comment that the Fed needed to hope for the best but prepare for the worst could as easily have been aimed at Capitol Hill, and the partisan nonsense going on there, as to the probable stop start nature of how the virus will affect life in local communities, and the implementation, as well as lifting of lockdown measures in response to future outbreaks.  

US stocks also finished the session higher helped by the Fed’s dovish message and this effect is likely to manifest itself into a similarly positive start for European stocks.

Earlier in the week, the US central bank also extended its emergency lending programs until the end of the year, in a sign that they are extremely concerned about how the US economy is doing.

This has been no better illustrated by the difference in the US economy from when the central bank met in June and the meeting last night. While payrolls data has improved somewhat from the sharp falls in March and April, there is a gnawing worry that the gains seen in May and June, could give way to a sharp slowdown in next week’s July payrolls numbers.

Last week’s weekly jobless claims numbers saw the first week on week increase since March, with 1.4m claims and there is a concern that we could see another increase this week as well to 1.45m, with continuing claims starting to follow suit, after hitting a three month low last week at 16.2m.

It’s also set to be a big day for the latest Q2 GDP numbers from Germany, and the US where we’ll get to see laid bare the extent of the hit to economic activity over the period of the economic lockdowns, in April, May and June.

We already know that the economic rot had started to set in at the end of Q1, with the German economy contracting -2.2% and the US economy contracting by -5%

Today’s numbers are expected to be even worse by an indeterminate factor, with the German economy predicted to contract by -9%, and the US economy by as much as -34.5%, though the margin of error is expected to be quite high, with estimates ranging from -20% to -40%.

In times such as these, the use of adjectives like unprecedented has become an almost daily event, however the use of it doesn’t change the fact that trying to determine the economic damage caused by the virus can’t really be estimated by calculations on a spreadsheet, given the knock-on effects it continues to have on human behaviour now as well as future economic activity over the next few quarters.

Today’s latest unemployment numbers for June from Italy, as well as the EU, are expected to see an increase, however it should be noted that the actual numbers will likely understate the extent of the hit to the respective labour markets. The unemployment rate for Italy is expected to rise to 8.6% from 7.8% and EU unemployment to 7.7% from 7.4%.

EURUSD – still on course for a move towards the 1.1825 level, and 61.8% retracement of the 1.2555/1.0635 down move. Any dips should find support at the 1.1680 level, and below that the 1.1590 level.

GBPUSD – moved above the 1.3000 level before slipping back with 1.3020 the next resistance level. A move through 1.3020 could see a return to 1.3200, and the March highs. Pullbacks should find support at 1.2920, while below that the 1.2770 area.  

EURGBP – while below the 0.9140 area the euro remains susceptible to a slide below the 0.9000 area support. A move through the 0.9000 level is needed to confirm such a scenario and open up a return the 0.8920 area,

USDJPY – the 104.50 level remains the next key support. A move below 104.50 opens up the March lows. We now have resistance at the 105.70 area and behind that at 106.50.

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