The Fed published its minutes yesterday, which lowered the demand of risky assets at the Asian session, in relation to the expectations of a slower recovery of the US economy and the problems brought by France and Germany’s decision to create additional funds for economic recovery.
The euphoria brought by France and Germany’s decision to create additional funds for economic recovery is gradually disappearing. Now, disputes and opposition to this fund are intensifying, but if no one discusses the € 500 billion needed for economic recovery, it will be difficult to say whether this fund will be approved. The problem lies in the decision to give the fund to the entire EU, not just in eurozone countries.
The minutes published by the Fed yesterday on its meeting in April revealed that the committee is considering using a calendar-based advance indication of interest rates, as Fed leaders are concerned about the risks of new outbreaks of coronavirus infection. Questions were also raised, with regards to the sharp increase in public debt, which may put pressure on economic growth in the future.
Fed Chairman Jerome Powell repeatedly expressed his opinion on this subject, giving forecasts that the current unprecedented growth of central bank assets, which is nearing $ 7 trillion, should not create problems for the US economy and inflation. According to Powell, the concern now is financial stability, followed by inflation, which is still normal amid the bloated Fed balance sheet. In pre-crisis 2007, the Fed had assets worth about $ 800 billion on the balance sheet, which inflated to $ 4.5 trillion during the financial crisis, and fell to $ 3.8 trillion by the end of the fiscal year in September 2019.
The Fed minutes also revealed that many managers are concerned about a prolonged crisis after the COVID-19 pandemic, which could negatively affect the banking system.
With regards to economic growth after the pandemic, US President Donald Trump said that the 3rd quarter of this year will be unbelievable, since according to the Congressional Budget Office, the economy will grow by more than 21.0%, the largest quarterly growth in the history of the country.
But before the US dollar could regain part of its position against the euro and the pound, a good report on consumer confidence was published, which supported the euro and allowed the bulls to push the quotes to the 10th figure. According to the data, the consumer confidence in the eurozone rose from -22 to -18.8 points in May this year, higher than economists forecast of -25 points. The slight increase in the index indicates that the measures taken by the governments were effective, and that the pressure put on consumers by the outbreak and the quarantine measures are gradually easing.
The statements made by Fed representatives may be interpreted in different ways. According to Robert Kaplan, the recovery and restoration of the economy will depend on levels of confidence, which, without additional monetary and fiscal stimulus, will not manifest. He also forecast that unemployment rate will soon reach 20%, and by the end of the year, it will be about 10%.
Meanwhile, Raphael Bostic is confident that the US is already coursing the peak of the crisis, claiming that the economy will begin to recover in the near future. According to him, the measures taken by the Fed did not lead to a sharp inflation spike, and inflation expectations will remain low in the future. However, it is difficult to agree with this statement because as soon as the first signs of economic growth and a decrease in the unemployment rate appear, inflationary pressures will begin to increase sharply, especially since a huge amount of money was injected into the economy, some of which will surely go to investments and will lead to increased costs for companies and enterprises. A zero interest rate is also a very attractive tool for inflation buildup.
As for the technical picture of the EUR / USD pair, after reaching the 10th figure, the demand for risky assets declined, The reports that will be published today on manufacturing activity and the service sector may play a trick on the euro and the pound, so opening buy positions at current highs are not recommended. Acceptable levels for opening long positions in the EUR / USD pair are the levels 1.0930 and 1.0900, but a breakout from 1.0980 may lead to a larger upward movement of risky assets, which will update the highs to the levels 1.1020 and 1.1090, provided that the PMI data are better than economists’ forecasts.
USD / CAD
Annual inflation in Canada reaching negative levels in April this year weakened the Canadian dollar, after rallying last week amid rising oil prices. According to the report published by Statistics Canada, CPI in April fell by 0.2% compared to the same period last year, lower than economists forecast of 0.1%.
Wholesale sales also declined in March this year. According to the report, the index declined by 2.2% compared with February, amounting to 63.85 billion Canadian dollars. Compared to the same period last year, wholesale sales in Canada fell by 0.3%.
As for the technical picture of the USD/CAD pair, bullish mood may remain in the pair, after a breakout in the area of 1.3870, which was tested more than three times in the last two months. A small rollback to 1.4020 may return large players who are betting on a further decrease in quotes and breakout to the 1.3870 lows in the market. Such a scenario will open a direct road to 1.3740 and 1.3650, where the 200 MA passes.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.