Jay Powell’s testimonial on Tuesday demonstrated the Fed’s intransigent position towards negative interest rates in the US. Meanwhile the assessment of economic prospects was rather gloomy, which together with NIRP comments resulted in a rather unbalanced and unusually dovish communication for a traditional centrist (which Jay Powell is), which disappointed market.
The most important economic update in the US today is initial unemployment claims which are expected to increase by another 2.5 million. It’s considerably less than in the past weeks but given Powell’s gloomy outlook, a miss in the data is unlikely to surprise anyone, but a positive surprise will likely support risk appetite, again, due to the fact that dovish Powell comments laid a rather “low base” for expectations about the US economy. This should be taken into account in the interpretation of incoming data.
The EIA confirmed decrease in Cushing inventories (-3M barrels), which is very positive news for the oil market. The IEA revised the average oil demand in 2020 by +690 thousand barrels per day, the comments of the head of Birol were slightly optimistic. In particular, he said that the drop in demand was not as strong as expected, as countries continue to lift restrictions.
Uncertainty with the path of economy reopening continues to put pressure on the pound. GBPUSD has tested the April low at 1.22, but in my opinion, GBP still has a room to fall. Today, all attention is on the webinar of the BoE head Bailey. As I wrote earlier, the government’s plans to increase public debt should be supported by the monetary policy, because acceleration in debt growth needs low rates. In particular, in order to keep the yield on government bonds at a low level, the Central Bank may have to push QE pedal and expectations for this step are now one of the drivers for GBP shorts. In a television interview, Bailey has already made it clear that the discussion on this topic is important.
Today the vice president of the ECB Guindos will hold a speech so the euro may react to comments of the second person in the ECB. He said on Tuesday that the peak of economic contraction had passed, but it was becoming increasingly difficult to predict how the economy would recover. A little optimism was added by data on inflation in Germany (0.9%, forecast 0.8%) and unemployment in France (7.8%, forecast 8.4%). Italy has presented a plan for a new fiscal stimulus of 55 billion euros. There are few growth catalysts for the euro, however Fed’s Powell helped the dollar to take a solid position, therefore, the growth of EURUSD is limited and it may be worth considering short positions with short goals. Nevertheless, in cross rates the euro will probably not back down.
Data on the labor market for April showed that the number of jobs decreased by 594 thousand, but the unemployment rate did not increase as much as expected. In April, it was 6.2% with a forecast of 8.2%. Now AUD has come under the fire, like, however, all other currencies that were the beneficiaries of the recent surge in demand for risky assets, but from the point of view of fundamental data, the Australian currency’s positions are quite strong. One of the arguments for this may be the fiscal stimulus of the government, which amounted to almost 16.5% of GDP.
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