USD Weakens As Fed Buys Corporate Bonds

Jun 16 20, 11:13 GMT

The USD weakened against some of its major counterparts yesterday and during today’s Asian session, as during the American session yesterday, the Fed announced that it would buy individual corporate bonds on the secondary market. The measure is to come into effect from today and be implemented through the Fed’s emergency secondary market corporate credit facility, while the bank plans to use an indexing approach to proceed with purchases of bonds in order to diversify the portfolio. The announcement ignited a risk on behavior at the market causing the USD to suffer safe-haven outflows and analysts tended to note the change in USD’s direction and the rise of the US treasury yields. We could see the USD being affected also by today’s US financial releases and most importantly from Fed Chair Powell’s testimony before the Senate later today. Given the bank’s recently released forecasts, we could see the Fed’s Chair avoiding any sugarcoating about the prospects of the US economy, while also may reiterate the possibility of further fiscal stimulus. On the fiscal side it should be mentioned that Trump’s government seems to weigh a $1trillion fiscal stimulus in infrastructure investment, in order to restart the economy. AUD/USD rallied yesterday breaking its downward trendline, the 0.6840 (S2) and the 0.6940 (S1) resistance lines now turned to support. Despite the pair’s upward movement, we tend to expect the rally to lose steam, probably with some correction lower before it decides its next leg. If a selling momentum occurs, we could see the pair breaking the 0.6940 (S1) line and aim for the 0.6840 (S2) level. If the pair finds fresh buying orders along its path, AUD/USD could aim if not break the 0.7025 (R1) line aiming for the 0.7100 (R2) level.

Pound rallies as UK-EU push for Brexit deal

The pound reversed course and strengthened yesterday, as signs for a possible deal between the EU and the UK about Brexit came up on the horizon. Please note that the development was somewhat expected in our report yesterday, yet the actual happening may have outperformed our expectations. After an hour-long videoconference between UK’s PM Johnson and the EU leadership, it seems that the UK-EU negotiations were revived. According to media, EU officials seem confident that the UK is willing to soften its position and compromise, while the EU is also to soften its approach. Characteristically Johnson stated later, that the two sides are not that far apart and that what was needed for the negotiations, was a bit of stimulus. The two sides are to enter intensified negotiations, and as UK PM Johnson stated “The faster we can do this the better: we see no reason why you shouldn’t get that done in July” providing substantial optimism. The development is a fundamental game changer for the pound, as the future relationship of the UK with the EU tended to weigh on the pound. Pound traders may turn their attention on the release of UK’s employment data for April during the early European session today. GBP/USD rallied yesterday breaking the 1.2580 (S2) and the 1.2645 (S1) resistance lines, now turned to support. As cable’s price action broke the downward trendline directing it, we switch our bearish outlook in favour of a bullish bias. If the bulls actually remain in charge, GBP/USD could break the 1.2725 (R1) line and aim for the 1.2800 (R2) level. If the bears prevail, the pair could reverse course once again and break the 1.2645 (S1) support line aiming for the 1.2580 (S2) level.

Other economic highlights today and early tomorrow

Today during the European session, we get Germany’s final HICP rate for May, UK’s employment data for April and Germany’s more forward looking ZEW indicators. In the American session, we get the US retail sales and industrial production growth rates for May, while just before the Asian session starts, we get the US API weekly crude oil inventories figure. During tomorrow’s Asian session, we get Japan’s trade balance for May. Please bear in mind that Fed’s Chairman Powell testifies before the US Congress today.

AUD/USD 4 Hour Chart