Friday, July 24, 2020

Week ahead: Will the Fed hint of negative interest rates this week?

NBHM Research Team

Global stocks moved sideways last week as traders reacted to mixed corporate earnings data from American and European companies. Among the notable companies that released their earnings were Amazon, Microsoft, Tesla, AT&T, and Southwest Airlines. In general, most companies released weak earnings that were, however, better than what analysts were expecting. The rising tensions between the United States and China remained in the spotlight. Meanwhile, we received positive vaccine-related news from AstraZeneca and Oxford University.

US dollar: The US dollar was under pressure last week as traders started to price-in weaker growth from the United States as the number of coronavirus cases continued to rise. Also, talks of another stimulus package in the US affected the strength of the greenback. The world’s reserve currency declined against most currencies, including the euro, sterling, and the Canadian dollar.

This week, the biggest driver to the US dollar will be the Fed interest rate decision. The FOMC will start its monthly meeting on Tuesday and deliver its decision on Wednesday. Analysts expect that the bank will leave interest rates unchanged at the current 0.25%. They will also listening to Jerome Powell for any clues on negative interest rates. In addition to the FOMC, the dollar will react to the durable goods orders that will come out today, consumer confidence data due tomorrow, and GDP numbers that will be released on Thursday.

Gold: Gold and other metals rose to multi-year highs last week as investors rushed to their safety. The surge was mostly because of low yields in government bonds and the ongoing talks about more stimulus. Technical factors also played a role in the rally as bulls attempted to test the all-time high of $1,920.

This week, gold price will move according to these factors. More tensions between the US and China, rising number of coronavirus cases, and the Fed interest rate decision is likely to lead to movements in the metal. The chart below shows that the price of gold is above the 100-day and 50-day moving averages while the RSI has jumped to the overbought level of 70.

NBHM Weekly overview

Euro: The euro rose for the fifth consecutive week as investors reflected on the successful EU leaders meeting that took place in Brussels. After four days of intense negotiations, the leaders agreed to a 750 billion euro recovery fund. Countries will receive 390 billion of these funds in grants while the rest will be distributed through low-interest rate loans. The fund, together with the positive numbers from Europe, has increased interest in the euro. This week, we will receive several important numbers from Europe. On Monday, the Ifo Institute will release consumer confidence data from Germany. On Tuesday, we will receive consumer confidence data from France and factory-gate inflation from Italy.

On Thursday, Destatis will release the first preliminary Q2 GDP data from Germany. Analysts polled by Reuters see the economy contracting by 10.9% in the quarter. We will also receive the business confidence and unemployment rate data from the Eurozone. Finally, on Friday, Italian GDP data is due.

S&P500: The S&P500 moved sideways last week as traders reacted to the vast amount of corporate earnings data. The earning season will continue this week, with hundreds of companies in the S&P expected to release their numbers. Notable companies that will release their earnings are Waste Management, Hasbro, Anglo American, Legg Mason, Visa, Pfizer, Amgen, McDonalds, Raytheon, 3M, Starbucks, S&P Global, Ecolab, Facebook, PayPal, Shopify, and Sanofi, among others.

Australian dollar: The Australian dollar rose slightly last week mostly because of the weaker US dollar. The ongoing “cold war” between the US and China has affected its performance. This week, we will receive several important economic data from Australia and China.

On Wednesday, the statistics office will release important inflation data for the second quarter. Analysts believe that inflation in the country declined from 2.2% to 2.0% as the country continued to reopen. They see the weighted mean CPI dropping from 1.7% to 1.5%.

On Thursday, the office will release the building approvals data and the import and export price index. Finally, on Friday, China Logistics will release the July manufacturing and non-manufacturing PMI data. The daily chart below shows that the AUD/USD pair has become overbought according to the Money Flow Index and the Relative Strength Index (RSI).

NBHM Weekly overview

Canadian dollar: The Canadian dollar strengthened against the US dollar because of the falling number of coronavirus cases in Canada, the upbeat economic numbers from the country, and the rising crude oil prices. Some of the recent upbeat economic data from Canada include employment, inflation, and retail sales.

This week, the economic calendar will have minimal data from Canada. The only data to watch will be the GDP numbers that will come out on Friday. Analysts expect that the economy contracted by 13% in May after shrinking by 11.6% in the previous month. Statistics Canada will also release the Industrial Product Price Index (IPPI) and Raw Materials Price Index (RMPI).

Silver: Silver price jumped to its highest level in four years as traders rushed to safe havens. The EU recovery fund deal coupled with improving polls by Joe Biden also contributed to its rise. That is because most of the funds in the EU recovery fund will go to green energy. Similarly, Joe Biden has proposed a multitrillion dollar climate plan. Silver is used in the manufacture of some green energy products like solar panels. At the same time, mine closures because of the pandemic has led to speculation that supply will reduce this year.​

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