Friday, June 19, 2020

Week ahead: Will the US dollar momentum continue?

NBHM Research Team

The biggest themes in the market last week were the central banks and the coronavirus. The Bank of Japan, Bank of England, Swiss National Bank, and Norges Bank released their interest rates decisions. All left rates unchanged but the BOE and BOJ added more money into their QE programs.

The US dollar index was relatively strong last week as investors continued to worry about a second wave of the virus. Gold price moved sideways while global stocks turned lower. The Dow Jones and the S&P500 fell for three straight days as the number of Covid-19 cases in the US continued to worry the investing community.

In Europe, the biggest corporate news was regarding Wirecard, the embattled payment processing firm. On Thursday, the company postponed its financial statements after the auditor questioned transactions worth almost €2 billion.

Gold: Gold price moved sideways last week as investors reflected on the dovish statements by the Federal Reserve. In a statement on Monday, Jerome Powell reiterated that the US economy would continue to struggle for several more years. On the same day, the Fed announced that it would start purchasing individual bonds in the secondary market. This is in addition to the bond ETFs it was buying before. This week, the price is likely to move in reaction to important US economic numbers like GDP, personal expenditure, and personal income. The chart below shows that gold price has been in consolidation while its volatility has fallen.

NBHM Week Ahead

British pound: The British pound turned lower last week after the Bank of England (BOE) delivered its interest rate decision. The bank left rates unchanged and added £100 billion to its asset purchases. In the same week, we received the country’s employment, inflation, and retail sales numbers. The data showed that the UK economy is facing its worst financial crisis in modern times. For example, on Wednesday, data from ONS showed that inflation dropped to the lowest level in four years. This week, the pound will react to the industrial trends orders and the flash manufacturing and services PMIs numbers.

US dollar: The US dollar moved slightly higher last week as investors rushed to its safety because of fears of a second wave of infections. The currency also reacted to several positive numbers from the US, including the upbeat retail sales numbers. These numbers, coming two weeks after the upbeat employment data, implied that the US may experience a V-shaped recovery. This week, the statistics office in the US will release the third and final reading of Q1 GDP data.

Analysts expect that the economy contracted by 5.0% in Q1. Also, they expect that durable goods orders bounced back by 7.1% in May after falling by 17.7% in the previous month. They also expect the durable goods orders, excluding non-defence, to fall by 10%. Other key data from the US will be existing and new home sales, Richmond manufacturing index, and flash manufacturing PMI data.

New Zealand dollar: New Zealand has been credited for its handling of the coronavirus outbreak. The government achieved this by announcing strict lockdown measures in March. As a result, the country of about 5 million people had less than 30 deaths. This week, the Reserve Bank of New Zealand (RBNZ) will deliver its interest rate decision. Analysts expect the bank will leave interest rates unchanged at 0.25% and sound cautious about the recovery. They will be watching Governor Adrian Orr’s comments about negative interest rates, which the bank has been considering.

Euro: The euro rally in the previous weeks came to an end last week partly because of a stronger US dollar. On a positive note for Europe, Angela Merkel is putting pressure on EU heads of states to ensure that the stimulus package announced by the European Commission passes before the summer break. Also, a few members who opposed the plan, including Hungary, have announced that they will support it. This means that the $826 billion recovery funding could be raised in a few months. Recent economic data from the region have also been positive. For example, auto registrations in May improved after tumbling in the previous month.

This week, the biggest euro-related data will be the flash manufacturing and services PMI data. Analysts expect that manufacturing PMI to have increased from 39.4 to 42.5. They also expect that the important services PMI to have risen from 30.5 to 38.5. In Germany, they expect that the two PMIs rose to 40.5 and 39.0 respectively. While these PMIs are still in negative territory, they imply that the region is recovering. Meanwhile, Ifo will release the German business confidence surveys for May on Wednesday, while the ECB will release the lending activity in May. The chart below shows the recent trends in the EUR/GBP pair.​

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