EUR / USD: Fed cuts below zero could be an unpleasant surprise for the dollar

By | May 13, 2020
InstaForex
EUR / USD: Fed cuts below zero could be an unpleasant surprise for the dollar
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If representatives of the Federal Reserve argue that to reduce unemployment in the United States from its potential peak of 20% to 9-10%, additional tax incentives will be required, why not the regulator give a gift to the national economy in the form of an interest rate cut below zero? It was such a gift that President of the United States Donald Trump spoke about, and his comments seem to concern market participants more than statements by FOMC officials about the dangers of negative borrowing costs. History shows that in the end, the American Central Bank did what the head of the White House wanted.

The data that was released on Tuesday showed that consumer prices in the US dropped to 0.8% in April. The fall in the indicator became the strongest since the crisis of 2008-2009, which increases the threat of deflation, as the US economy is plunging deeper into the recession, and fueling debate about new measures of the Fed’s monetary policy.

“I would not advise them to introduce negative rates. Japan has done this, and it is believed that the result was not so successful, “said Hiroyuki Ueno, senior strategist at Sumitomo Mitsui Trust Asset Management.

However, not everyone adheres to this opinion. Thus, JP Morgan experts point to the experience of the ECB and believe that a moderate reduction in borrowing costs in the negative area will do more good than harm. According to them, the positive from weakening financing conditions and the reduction of fragmentation risks in Europe outweighs the negative from a decrease in activity on the interbank market.

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So far, representatives of the American Central Bank have stated that they see no need to reduce interest rates below zero, and some market participants expect that Fed Chairman Jerome Powell and his colleagues will adhere to this scenario.

“If US market rates continue to decline, the Fed will need much more communications to reverse such market movements. I think that the current message of the Federal Reserve will most likely be something like the regulator will focus more on easing credit conditions than negative rates, “said Kazushige Kaida from State Street Bank.

However, if Trump continues to put pressure on Powell on this issue, and the US monetary authorities succumb to such pressure or even allow the possibility of further lowering of interest rates, this could trigger a fall in the dollar.

In addition, do not forget that the United States needs to finance the costs of a colossal emission of government bonds. For the seven months of the fiscal year 2020, which began on October 1, the negative balance of the US budget increased by 2.8 times and exceeded $ 1.481 trillion. The country’s Ministry of Finance plans to issue treasuries for $ 3 trillion in the second quarter and $ 4.5 trillion in the current fiscal year. If you make buyers pay these debts, it will be a real gift for the American economy. At the same time, the greenback will weaken, which in the long run will experience problems due to an increase in the issue of treasury bonds and excessive inflation of the Fed’s balance sheet.

So far, rumors about the Fed’s negative rates have not been enough to drown the dollar. The EUR / USD bears quickly came to their senses amid the fact that US President Donald Trump banned the main state-federal pension fund, which manages about $ 600 billion, from investing in shares of Chinese companies due to national security reasons. The ax of the Washington and Beijing trade war has not yet been buried, which greatly scared the S&P 500 along with concerns about the second wave of the coronavirus pandemic. The fall of the US stock index at the close of trading on May 12 set the bandwagon on the euro. The inability of the euro to stay above the levels of $ 1.0840–1.0850 could result in serious problems for the bulls.

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