Federal Reserve Chairman Jerome Powell confirmed the central bank's opposition to negative interest rates but was still downbeat on the US economy. This is keeping risk assets on the soft side and the dollar supported.
US Fed Chairman, Jerome Powell, announcing a cut in US rates
USD: No reversals in sight
Fed Chair Jerome Powell confirmed the firm stance of the Fed against additional rate cuts but delivered quite a downbeat view on the economy, all of which contributed to keeping risk assets on the soft side and the dollar supported. Fedspeak will stop today and the only key release in the calendar is initial jobless claims, expected to be c.2.5 million. This would confirm a slowing trend in claims, but the market reaction to jobs data has been relatively muted lately and global sentiment should primarily remain a function of whether US reopening plans will continue despite recent warnings from top health officials. Oil prices are still the side story to monitor, as the stabilisation/rebound continues after inventories dropped for the first time since January. This may provide some shelter to the Canadian dollar and Norwegian krone versus other pro-cyclicals. Turning back to the USD, it’s still hard to argue in favour of an imminent reversal: DXY should remain close or above 100 for the remainder of the week. The yen, however may still prove its resilience, with USD/JPY staying on a gentle downtrend.
EUR: Still supported in the crosses
The ECB’s Economic Bulletin released today will provide some colour on the Bank’s economic assessment, but with the easing of lockdown measures having intensified in the past weeks, the estimates contained in the document may prove outdated, and market impact limited. ECB Vice President Luis De Guindos will speak again today (16:00 GMT) after suggesting yesterday that the worst of the contraction in the eurozone is behind us (albeit highlighting uncertainty around the recovery). Meanwhile, Italy unveiled the details of a fresh EUR 55 billion fiscal stimulus plan. Lacking clear catalysts for the time being, EUR/USD may stay capped on USD strength, but the EUR may retain some resilience in the crosses.
GBP: Eyes on Bailey
As sterling battles with uncertainty around the UK’s reopening plans, today’s speech by Bank of England Governor Andrew Bailey at a webinar should take centre stage. Markets will mostly look for hints about the timing (June appears to be the designated meeting) and size (a lot more uncertainty here, unlikely to be clarified just yet) of any extension of QE. In a TV interview, the governor already hinted that more QE may be on the way. Also, the question of negative rates may be raised and while we don’t expect the governor to categorically rule them out, we still think it’s a very remote possibility (and markets should remain rather sceptical, too). The impact of recent BoE decisions has been somewhat limited, and we expect any related move to be quite short-lived.
AUD: Paying the price of high expectations
The Australian dollar is under pressure in early trading as the jobs report showed a 594k drop in employment, the highest on record, although unemployment rose rather modestly to 6.2% compared to the estimated 8.2%. The AUD may be paying the price of having been at the forefront in the risk recovery, thanks to relatively strong fundamentals: we doubt this data has severely dented these fundamentals, especially considering the large fiscal stimulus plan deployed by the Australian government (c.16.4% of GDP).
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