FOMC Stays Dovish, US GDP Enters the Limelight

The US dollar continued trading lower against the other G10 currencies, while equities rebounded, after the Fed pledged to do what is necessary and for as long as it is required in order to bring the economy to its pre-coronavirus levels. As for today, investors will stay focused on headlines and developments surrounding the US Congress’s decision over a new coronavirus-aid bill, while keeping an eye on the 1 stestimate of the US GDP for Q2.

USD Slides, Equities Gain After Fed; Investors Lock Gaze on US Congress and GDP

The dollar continued trading lower against the majority of the other G10 currencies on Wednesday and during the Asian morning Thursday. It underperformed the most versus NOK, CHF, SEK, and GBP in that order, while it eked out some gains only versus NZD. The greenback was found virtually unchanged against JPY.

The weakness in the dollar and the yen suggests that markets traded in a risk-on fashion yesterday. However, the weakening of the Kiwi, as well as the fact that the franc was among the main gainers, point otherwise. Thus, in order to get a better picture on the broader investor morale, we prefer to turn our gaze to the equity world. There, most major EU indices closed in negative waters ahead of the FOMC decision, but the US ones ended positive in the aftermath of the announcement, gaining on average 1.07%. The improved appetite rolled somewhat over during the Asian session today as well. Although Japan’s Nikkei slid 0.28%, at the time of writing, China’s Shanghai Composite and Hong Kong’s Hang Seng are up 0.15% and 0.78% respectively.

Yesterday, the main event on the agenda was the FOMC decision. As was widely anticipated, the Committee kept interest rates unchanged and repeated that they will continue to increase purchases of bonds and mortgage-backed securities “at least at the current pace”, which suggests that purchases can accelerate if deemed necessary. On top of that, officials added that the path of the economy will depend significantly on the course of the virus, and although activity and employment have picked up somewhat in recent months, they remain well below their levels at the beginning of the year.

At the press conference following the decision, Fed Chief Jerome Powell said that they are committed to do what they can and for as long as it takes. The current stance is appropriate, and we are prepared to adjust as appropriate, he added. He also repeated, and even enhanced, his previous statement that they are “not even thinking about thinking about thinking about raising rates”, adding a “thinking about” to highlight that interest rates are likely to stay at the current level until they are certain that the economy has weathered the pandemic and is on track for maximum employment and price stability goals.

In our view, the key takeaway from this meeting is that policymakers are willing to expand their stimulative efforts if the situation worsens. That said, when asked about what more could be done, Powell said that more fiscal support would help. Equities rebounded on the dovish message from the Fed, but now it seems that the ball is on the Congress’s court. Yesterday, US President Donald Trump said that his administration and Democrats in Congress are still “far apart” on a new coronavirus-aid bill. With the enhanced unemployment benefits expiring tomorrow, investors are biting their nails in anticipation over whether a common ground could be found. The Republicans proposed a USD 1trl plan, but the Democrats see that proposal as not sufficient and instead suggest a USD 3trl bill. As we noted yesterday, for equities to stay supported, we believe that any agreed plan has to be as close as possible to Democrats’ proposal. Anything near the 1trl, or even lower, may come as a disappointment. Republicans’ plan is not considered insufficient only by Democrats, but also by many market participants.

Apart from headlines and developments surrounding the debate in Congress over the new coronavirus bill, investors may also keep an eye on the 1st estimate of the US GDP for Q2. The forecast suggests that the coronavirus-related lockdown caused the economy to collapse by a historic 34% qoq SAAR after contracting 5% in the first three months of the year. The Atlanta Fed GDPNow model points to a -32.1% rate, close to the consensus, but the New York Nowcast suggests that the economy contracted only 14.3%. If indeed, the actual print is closer to the New York estimate, risk-linked assets are likely to gain and safe havens could slide, as this will mean that the economic wounds from the coronavirus are not as severe as initially afraid. On the other hand, a worse than expected number would raise fears and concerns that the already adopted stimulative measures are not having the desired effect and that more may be needed. This may strengthen the view that a USD 1trl aid package by the US government may not be enough.

S&P 500 — Technical Outlook

The S&P 500 cash index traded higher yesterday after it hit support near the 3212 level. However, the recovery was halted by the 3265 barrier and today, the index retreated somewhat. Overall, the index continues to trade above the key support zone between the 3212 level and the psychological 3200 barrier, and thus, we would see decent chances for the bulls to jump back into the action at some point soon, even if the price corrects a bit lower.

Further declines may result in another test near the 3212 level, but the bulls may take charge once again from near that zone, and perhaps pull the trigger for another test at 3265. If they manage to overcome that barrier this time around, we may see them aiming for the peak of July 23 rd, at around 3293. Another break, above 3293, could set the stage for extensions towards the low of February 21 st, at 3325.

On the downside, a decisive break below 3200 may signal the completion of a complex “Head and Shoulders” formation and may turn the near-term outlook to a negative one. The bears may get encouraged to push the battle towards the 3150 zone, the break of which may extend the decline towards the low of July 9 th, at 3115.

AUD/JPY — Technical Outlook

AUD/JPY has been trading in a consolidative manner since last Friday, staying between the psychological 75.00 level and the 75.55 resistance barrier. Overall though, the rate is still trading above the upside support line drawn from the low of June 12 th, something that keeps the short-term outlook cautiously positive.

That said though, in order to start examining higher areas, we would like to see a decisive break above the 75.55 resistance barrier. Such a move may wake up more bulls, who could drive the battle up, towards the 76.43 zone, marked by an intraday swing low formed on July 23 rd. If that level is not able to halt the advance, the next resistance to consider may be the 76.78 area, which is marked by the high of June 8 th, and also prevented the rate from moving higher on July 22 nd.

On the downside, a break below the 75.00 zone may also take the pair below the aforementioned upside line. The bears could then push the action towards the low of July 16 th, at 74.67, the break of which may allow a dive towards the low of July 10 th, at around 74.00.

As for the Rest of Today’s Events

During the European morning, we have Germany’s 1st estimate of GDP for Q2 and the nation’s preliminary CPIs for July. The German GDP is forecast to have contracted 9.0% qoq, after shrinking 2.2% in Q1, while the CPI rate is anticipated to have fallen to +0.1% yoy from +0.9%. The German unemployment rate, as well as that for the Eurozone as a whole are also coming out. The German rate is expected to have ticked up to 6.5% from 6.4%, while the Euro-area one is forecast to have risen to 7.7% from 7.4%.

Tonight, during the Asian morning Friday, we have Japan’s employment and industrial production data for June. The unemployment rate is expected to have increased to 3.1% from 2.9%, while the jobs-to-applications ratio is anticipated to have declined to 1.16 from 1.20. Industrial production is anticipated to have rebounded 1.2% mom after falling 8.9%.

In China, the official PMIs for July are coming out. The manufacturing index is anticipated to have ticked up to 51.0, but no forecast is available for the non-manufacturing and composite prints. Following the second outbreak of the coronavirus in China, it would be interesting to see whether there were any economic damages due to that, and if so, how severe they were.


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Originally published at on July 30, 2020.



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