Powell's Warning, But Dollar Most Likely To Remain Strong

The head of the US Federal Reserve, Jerome Powell, said on Wednesday last week that the country could wait for a long period of weak growth and stagnation in terms of income, he promised to use additional instruments of the Fed, if necessary and called for increased budget spending.

As Powell noted during an online broadcast for the Peterson Institute for the World Economy, the US reaction has so far been quick and decisive, but it may take some time to recover, depending on progress in the fight against the coronavirus pandemic.

According to the head of the Fed, the longer the risks remain in the healthcare sector, the more companies and citizens will face financial difficulties, and the most vulnerable categories of the population will suffer especially severe damage. According to a recent Fed survey, in 40% of families with incomes of less than $ 40,000 a year since February, at least one person has lost a job.

Powell declared that additional financial support could be expensive, but it's worth it if it helps to avoid long-term economic damage and provides citizens with a more confident recovery, thereby essentially urging Congress to allocate additional funds besides the already approved anti-crisis packages to the general amounting to about 3 trillion dollars.

The USA, the worst-affected country in the world by Covid-19 has seen a lot of unemployment in the recent period. The economic situation deteriorated as well as the local currency. You can notice it in FX trading as well, where eurusd chart struggled temporarily because of the ongoing crisis.

Dow futures rise

In the morning, e-mini Dow futures rose 163 points or 0.69 percent, the S&P 500 - 19.25 points or 0.67 percent, and Nasdaq - 76.75 points or 0.85 percent. However, after Powell's speech, futures for US stock indices fell, offsetting previously recorded growth. The yield on securities of the Federal Treasury has declined, and some interest-bearing futures offer the price a small chance that the Fed may turn to negative rates.

In futures trading, they began to consider such an opportunity last week, and on Tuesday President Donald Trump again appealed to the Fed, however, a number of central bank representatives said that they did not see the need to divert rates that were already close to zero to negative territory.

Meanwhile, in anticipation of the opening of trading, shares of pharmaceutical company Mylan NV rose 1.7 percent after the company signed a licensing agreement with Gilead to release Remdesivir, which has recently received emergency approval for use with patients with COVID-19.

Analysis

As expected, the speech of the US Federal Reserve Chairman Jerome Powell was able to support the position of the American currency. The USD (DXY) index once again consolidated above the psychological level of 100, maintaining the recovery dynamics today.

During an online conference on Wednesday, Powell noted that economic recovery after the mass closure of enterprises as part of quarantine measures to curb the spread of coronavirus would be complex and lengthy. Powell's comments clearly showed his concern about the consequences of a slower and more difficult recovery than expected less than two months ago, when lawmakers generously allocated funds to support households and businesses, and the Fed flooded the economy with trillions of credit dollars. Powell also noted that in terms of scale and speed, the current economic downturn has no precedent in modern history, and it is much worse than any recession since the Second World War.

It is worth noting that the primary reaction of the dollar to these comments was a decrease because, against such depressing prospects for the global economy, market participants seriously admitted that Powell would indicate a willingness to introduce negative interest rates. 

However, this did not happen. The Fed Chairman said that he was not disposed to use this monetary policy tool, which had shown dubious effectiveness in Europe and Japan and could become an insurmountable obstacle to new bank lending. On these statements, the initiative again passed to the buyers of the dollar, as a result of which the day was closed in positive territory.

Additional support to the US currency continues to provide increased tension in trade relations between the United States and China. This week, Donald Trump has banned US pension funds from investing in Chinese securities. Market participants fear that explicit anti-Chinese rhetoric could lead to the introduction of new import duties, which would further cloud the prospects for global economic growth. Given the above, it is believable that the demand for the dollar, as a protective asset, will continue.