This week focus in the US earnings season shifts from banks to the tech sector, but stock markets remains relatively resilient to headwinds of various intensity, whether it be the smoldering US-Sino conflict or far more serious accelerating daily gain in Covid-19 cases. Nonetheless, market sentiment and demand for USD are sensitive to the data that shed light on how quickly economies recover. In this context, weekly data on US mortgage applications on Wednesday and production PMI on Friday will be of particular interest.
Markets will be also sensitive to news related to extension of the government’s coronavirus relief measures which are set to expire at the end of July. Without them, the US economy which showed signs of takeoff, will likely to experience quick loss of altitude and hard landing. The reason for this is that states reopening in the US clearly went wrong – due to accelerating increase in the new cases, states which represent 80% of the population, paused or began to return lockdowns:
In the chart above, it can be seen that as of June 24, the states, where more than 90% of the population live, in one way or another were lifting restrictions (width of the blue area is 90%). With acceleration of the incidence of Covid-19, the situation has changed dramatically – the states, which represent 40% of the US nation, have paused lifting lockdowns (gray zone), in the states where the other 40% live, restrictions are increasing (red zone). Of course, this setback increases odds that removing fiscal support will unwind all recent achievements in the labor market and especially in protection of consumer confidence. Democrats leading in polls ahead of the presidential election put Republicans in a less favorable position so they may be more inclined to make concessions to approve new stimulus bill.
EURUSD continues to move upward thanks to the progress in negotiations on the Eurozone Recovery Fund. If member states manage to agree, for the first time in the history of the EU, Eurozone bonds (mutualized debt) will be issued, which will become a source of financing for the stimulus project.
Expectations of the issuance of “palatable debt” are drawing investors in the euro, and the closer the negotiations are to success, the more EURUSD strengthening can be expected. Nevertheless, some EU leaders warned that despite the compromises made, the negotiations could fail.
The Eurozone consolidated debt topic sets the euro apart from other dollar peers and is likely to allow the pair to test the important 1.15 level this week:
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