Market Overview

19 August 2020

The Dollar Weakens to the New Low of the Year

It seems that Wall Street is having another record run to heaven with the U.S. S&P500 broad markets index exceeding its previous historical peak of February 20 by several points before the coronacrisis shock feeds the investment community's confidence with earlier signs of global economic recovery. Markets were not very disturbed even after an uncourteous reply by U.S. President Donald Trump, who was said late on Tuesday that he had cancelled a scheduled session of trade face-off with Chinese representatives last Saturday because he "didn't want to talk to them." 

European stocks were largely traded flat but little higher on Wednesday after the normal "economic temperature" was signalled by the fresh Eurozone inflation data. The consumer price index (CPI) showed -0.4% in July vs June but +0.4% annually, and the European Central Bank's favourite harmonised index of consumer prices (HICP) excluding energy and food components was even +1.3% year-on-year. 

The U.K. inflation surprisingly came up with the general monthly CPI at 0.4% in and the annual figure at 1.0% that was much above the -0.1% and 0.6% expectation by Bloomberg’s expert polls. Core British CPI, which measures the changes in the price of goods and services excluding food and energy, is now +1.8% year-on-year, with the core retail price index (RPI) excluding mortgage payments even at +1.9%. U.K. inflation jumped to its highest rate since March. That may help the Sterling to keep yesterday's gains, as GBP/USD soared to 1.3265 but then rolled back to just above the 1.32 area as U.K. and EU negotiators started the next round of trade talks on the back of the U.K.’s departure from the bloc. 

There are also points of view that warn against excessive optimism. “Sterling’s recent good performance and resilience to grim economic data has likely relied on the Brexit story being put on the back burner by investors. Our base case remains for a deal to be ultimately reached, but we expect the over-complacent GBP to face increasing Brexit-related stress in the coming weeks, making it a possible key laggard in the G10 space,” said analysts at Dutch origin ING group. 

However, the majority of the market, judging at least by its practical behaviour on the charts, may still not have a complacent but a clearly positive sentiment in relation to business activity on both continents. That relates to the British Isles too. Plus, the current economic indicators confirm the tendency. This transforms any idea of safe-haven purchases of the U.S. currency into a non-issue, as a purpose to place too many Dollars in almost zero-income Treasury bonds looks rather strange for now, when a lot of funds and banks forecast that the Greenback will depreciate in the course of several months. 

These expectations for the future in combination with stock markets confidence are accelerating the weakening of the U.S. currency. As a result, EUR/USD climbed to the middle of the 1.19 figure, setting a new high since May 2018, as well as AUD/USD showed a new high of 2020 at 0.7275 and looks ready to repeat its peak of January 2019 near 0.73. The Qiwi also won, although in the absence of important statistics or critical news from New Zealand, catching up with the Aussie, as NZD/USD gained 90 basis points, from the 0.6560 to the 0.6650 area, over the past twenty-four hours. 

The release of the U.S. weekly jobless claims numbers and Philadelphia Fed August business conditions indexes may even pour more oil on flames of the Greenback's sell-off if the positive numbers would make markets sure that there is no threat to urgently escaping, as it already happened with the U.S. retail sales and Michigan University estimates last Friday. With all these considerations in mind today investors are keeping an eye on the minutes from the July's Federal Open Market Committee (FOMC) meeting of the U.S. Federal Reserve (Fed) for any hints about the regulator's readiness to make more intensive monetary easing moves before the end of the year. 

There are also talks that the Fed may set an average inflation target, as the inflation figures have been much below the two % target for a time of crisis . So, the Fed could discuss an average target to push inflation above the normal two % target. This would mean more rounds of the so-called quantitative easing (QE), which many traders are calling a "money printing press", and it may finally help the economy and stock markets, but devalue the national currency. But if the market would see no signs of additional measures, it may arrange a technical consolidation for the Dollar to give it a short break. “We doubt that the release will offer enough push to the USD to invert the trend and any potential USD-positive effect may be short-lived on the back of an opportunistic sell-the-rally approach on the dollar,” the analysts remarked in the same ING group research note.

 

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Lysakov Sergey
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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