- Rates: Powell rules out NIRP
Fed Chair Powell ruled out negative policy rates, but added that the Fed is ready to use its existing toolkit if needed to tackle downside risks surrounding an already uncertain outlook. European and US stock markets arrived at first important support levels. Breaks could elevate bonds gains. - Currencies: Powell arrests EUR/USD topside test
The dollar initially didn’t profit from a risk-off sentiment yesterday, but rebounded as Fed’s Powell ruled out a negative US policy rate. EUR/USD is locked in the ST 1.0727-1.09 ST consolidation pattern. The yen again competes with the dollar as preferred safe haven. Sterling is fighting an uphill battle with EUR/GBP 0.8860 resistance at risk of a break.
The Sunrise Headlines
- US indices all ended in the red following Powell’s dire economic outlook. The DJI underperformed (-2.17%). Asian stocks go lower in lockstep though moves are less pronounced. India (-1.3%) underperforms.
- Fed chair Powell warned for liquidity issues to turn into solvency matters which could cause lasting damage, therefore urging authorities to do more. He excluded negative rates, citing they hurt bank profitability and thus credit flow.
- Italy approved €55 billion in support aimed at boosting liquidity for firms and aid for families. The package includes emergency income measures, tax cuts worth €4 bn and grants for SME’s.
- Australia registered a record slump in employment of almost 600 000 in the month April amid the country’s lockdown. The unemployment rate shot up from 5.2% to 6.2%. The Aussie dollar fell slightly.
- Governor Bailey said the BoE can help spreading the cost (of the government interventions) over time, hinting at more stimulus and raising odds of the central bank stepping up its QE programme rather soon.
- New Zealand unveiled a huge fiscal stimulus package worth NZ$50 billion that could help the economy grow again next year. Debt is expected to surge from 19% to 53.6% of GDP in 2023 and to decline again not earlier than 2028.
- In today’s economic calendar we watch for the US initial and continuing jobless claims. The ECB publishes its economic bulletin. Several speeches by ECB, BoE and Fed members are due.
Currencies: Powell Arrests EUR/USD Topside Test
Powell arrests EUR/USD ‘topside test’
The dollar initially didn’t profit from a risk-off sentiment in Europe yesterday. The US currency declined further as Fed’s Powell highlighted an unprecedented degree of uncertainty regarding the economic impact of the corona virus. It might cause long-term damage resulting in solvency problems and lasting high unemployment. EUR/USD filled offers in the high 1.08-area but the USD changed course as Powell clearly said that negative rates are no option for the Fed. An acceleration in losses on equity markets reinforced the USD safe haven bid. EUR/USD closed at 1.0818 (from 1.0848). The rise of the yen also slowed but USD/JPY still close the session lower at 107.03 (from 107.14).
This morning, Asian equities are joining the self-off in Europe and on WS yesterday, but losses are more modest. The Aussie dollar is correcting further (0.6430 area). The unemployment rate rose less than expected (6.2%), but other indicators suggest that the ‘real’ underemployment is much higher. The New-Zealand government unveiled a massive NZD$50 bln recovery fund. The Kiwi dollar hovers just below the NZD/USD 0.60 level as the debate on negative rates broke the positive momentum of the currency. USD/JPY is drifting below 107. So, the yen is again on equal footing to the dollar with respect to their role as safe haven currencies.
Later today, the calendar mostly contains second tier data, with the weekly US jobless claims the exception to the rule. New claims are expected to ‘slow’ to 2 500K, but remain very high. After yesterday’s downbeat assessment of Fed’s Powell, more bad news from the labour market might weigh on risk sentiment. If so, it might be slightly supportive for the dollar, except for USD/JPY. Yesterday’s rejected ‘topside’ test only confirmed that the room for sustained EUR/USD gains stays limited. We expect more sideways trading in the 1.0727/1.09 range going into a heavy eco calendar tomorrow.
Sterling continued to fight an uphill battle yesterday. The reopening of the economy doesn’t go smooth at all. The risk-off was a sterling negative, too. BoE governor Bailey in an interview clearly indicated that the bank is ready help financing public spending to cope with the economic fall-out of the corona virus. It didn’t sterling much. EUR/GBP closed at 0.8843. With sentiment turning further risk-off and several other issues pending (Brexit, exit strategy), the recent sterling correction could be extended beyond the EUR/GBP 0.8860 resistance.
EUR/USD rebound aborted as Powell excludes negative rates
