EUR / USD: A weakening dollar, negative US rates and second wave of the coronavirus

By | May 15, 2020
InstaForex
EUR / USD: A weakening dollar, negative US rates and second wave of the coronavirus
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Fed Chairman Jerome Powell was the last in the parade of FOMC officials who turned their backs on the idea that the regulator could push the interest rates into negative territory. This allowed the USD index to stay above the psychologically important mark of 100 points.

On Wednesday, Powell said that the Federal Reserve is not disposed to the introduction of negative rates, because the monetary policy tool has shown dubious effectiveness in Europe and Asia, and has the possibility of turning into an insurmountable obstacle to new bank lending.

“Another major setback in the US economy may prompt the Fed to consider lowering interest rates on negative territory,” experts at the Goldman Sachs believe.

According to them, the trigger can be the second wave of the coronavirus pandemic, which can disrupt the upcoming recovery of the US economy.

“In the event of a second wave of the coronavirus pandemic in the US, another strong recession may occur, which will open up the possibility of new assistance measures by the Fed,” experts said.

“Although we believe that even with this scenario, fiscal policy will come first, the Central Bank may want to try something new, especially if the economy has to fight the virus for a certain period. Therefore, the regulator may consider negative interest rates,” they added.

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An interest rate below zero in the United States may lead to the weakening of the dollar. But in the meantime, demand for the dollar as a defensive asset remains, since market participants fear that the recent rhetoric of US President Donald Trump could lead to the introduction of new import duties, which will further darken the prospects of global economic growth.

As for the main currency pair, after the ups and downs in February-March, it, like a ship, sways along the waves, the amplitude of which is becoming smaller. The bulls failed to break above the level of 1.0900, and the attempts of the brears to overcome the support level of 1.0700 was unsuccessful as well. Obviously, the pair needs a fresh driver that could take it beyond the specified boundaries, but no such driver has been found yet.

Meanwhile, the euro is supported by the growth of US stock indices, which were impressed by the decrease in the figure of unemployment in the country, as well as on the data in industrial production in China, which showed a 3.9% increase in April in annual terms. Retail sales and investments in China, on the other hand, continue to decline, as US President Donald Trump refuses to continue the negotiations with Chinese President Xi Jinping. Trump also seems to be considering a complete breakdown in relations with Beijing, since the tension between the two parties continues to escalate. The situation has brought naught but fears and nervousness to everyone, as everyone remembers how much negative the trade war between the United States and China brought for the export-oriented economy of the eurozone in 2018-2019.

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Thus, the euro is unstable, and if it were not for the US stock indices clinging to any positive news, not for the factors of long-term weakness of the dollar, the EUR / USD pair would have long gone below the levels of 1.0770-1.0775. The colossal debt of the US, as well as the increase in the Fed’s balance sheet to $ 9.29 trillion by December 2020, prevent investors from relaxing, and they are now acutely concerned on when it will be necessary to sell the dollar.

“The US dollar, which is currently overvalued by 20%, could drop significantly in the foreseeable future as the global economy recovers,” strategists at the Goldman Sachs believe.

“US interest rates have been a major factor in providing good USD support over the past few years, and this source of support has now disappeared. Rates in the United States are now much closer to the minimum levels that we have seen in the rest of the world,” they explained.

Bloomberg experts estimate that at the end of 2020, the EUR / USD pair will value 1.12. Although it fell from the 1.15 expected in January, bulls still believe that the euro will recover, and the necessary conditions for it are the absence of trade war between US and China, as well as the rapid growth of the world economy in the second half of the year. In the meantime, the EUR / USD pair is enjoying the calm and does not intend to leave the borders of the trading range of 1.0700–1.0900.

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