Marius Paun | London, UK | Senior dealer | Friday 28th August 2020
The US Inflation Target Of 2% – No More?
It’s official, the US Republicans nominated Donald Trump this week to face Joe Biden in the November Presidential elections. Currently the Democrats candidate has a 6-7% lead but many analysts say it’s still too early to call it. Meanwhile, Nasdaq and S&P closed at record highs again with the Dow within touching distance of its all-time high.
On Thursday we saw the US Fed Chair Jerome Powell speaks at Jackson Hole Symposium discussing inflation and monetary policy. He said the Fed will allow inflation to rise higher than what previously was seen as acceptable before intervening by hiking interest rates. It means they will aim to achieve inflation above the 2% target.
China confirmed that Vice Premier Liu He spoke to US Trade Representative Lighthizer and Treasury Secretary Mnuchin regarding phase 1 trade agreement. Apparently, the discussion went well with both sides ready to push forward the implementation of the trade deal. Elsewhere, China’s central bank reiterated its monetary policy will not change and that it will continue to pump liquidity into the financial system.
Europe’s biggest economy, Germany saw its GDP shrinking less than expected, down 9.7% versus a drop of 10.1% quarter on quarter. It was still the biggest contraction on record. At the same time business morale showed a slight improvement with Ifo business climate Index rising to 92.6 vs 92.1 anticipated. Interestingly, Germany has also extended its wage support program due to coronavirus to the end of 2021.
The debt has increased significantly in the UK due to Covid-19 to more than £2 trillion. UK borrowing is now above 100% of country’s GDP for the first time since 1963 according to Financial Times. Although rising taxes was mentioned recently as a possible solution for the deficit, the Prime Minister chief adviser Dominic Cummings seems to favour a cut in spending.
Gold prices moved back above $1950 going into the weekend. They tested support just above $1900 mid-week but sellers could not breach that mark so a rebound followed. The Fed Chair statement was considered US dollar bearish which could add extra support for the precious metal. A fresh stimulus package is still being debated. When that will be agreed upon it should be even more of a tailwind for gold.
The US crude prices reached new recent highs this week at $43.85 last seen in early March this year. It was not much of a gain for the week but at least the trend is still up. The US Department of Energy released its weekly inventories report showing a drop of 4.7 million barrels versus expectations for a decline of 3.4 million barrels.
Marius Paun | London, UK | Senior dealer | Thursday, 27th August 2020
The stockmarkets lows in March this year coincide with EURUSD lows for the year. Initial panic has pushed investors into the safety of the US dollar and out of pretty much everything else including gold. Governments and central banks around the world felt compelled to intervene to support their economies. Politicians were quick to justify the unprecedented stimulus sayings ‘people lost jobs through no fault of their own’.
Last month, the European Union leaders finally found some common ground after endless debates and agreed their respective stimulus package. Th emergency fund will be covered by issuing EU debt jointly and will give out 360 billion euros of low interest loans together with 390 billion euros of grants. Around a third was designed to fight climate change and coupled with additional spending in the next budget will represent the most generous green stimulus in history.
It appears that Italy and Spain will be the biggest beneficiaries of this EU pandemic recovery fund getting grants of 44.8 billion euros and 43.4 billion euros respectively. Other top beneficiaries included France and Greece according to Bloomberg. It seems that while those are countries reporting big casualties in terms of pandemic infections, a big hit for their tourism sector also might have influenced the decision. The biggest contributor, Germany will get 15.2 billion euros in grants and the funds will be used to avoid taking on debt rather than fuelling expansion.
European governments also adopted a supporting role when it came to rescuing jobs rather than letting the economy adapt to a new post pandemic world. Germany along France, Italy and Switzerland extended their programs where governments cover the wages for those who cannot work. It seems that without a vaccine and signs of infections figures rising again, Europe is really trying to avoid a spike in unemployment.
Ironic, the euro moved into a consolidation phase against the US dollar for the last 5 weeks or so after it rallied sharply since March. On Thursday we saw the US Fed Chair Jerome Powell speaking at Jackson Hole Symposium discussing inflation and monetary policy. There was already widespread speculation that Powell will announce a change in the way the Fed will look at inflation target moving forward. Traders were also expecting changes in the way the interest rate policy is set.
Indeed Chair Powell delivered just that saying they will allow inflation to rise higher than what previously was seen as acceptable before intervening by hiking interest rates. It’s true that interest rates are near zero right now and not anticipated to rise any time soon. However it looks like they will stay lower for even longer than investors imagined. They not even contemplating about thinking to raise rates.
Currently, inflation is way below 2% target rate and has been there for a lengthy period. That seems to be out of the window going forward. The thought of looking for intervention button once inflation gets to 2% is gone. Powell’s statement means they will tolerate inflation above 2% and will not rush to hike rates even if they see an acceleration.
It was what markets wanted to hear with many already saying the stock market rally still has legs and that the outlook for the US dollar has become even bleaker. The immediate reaction in the EURUSD was indeed a swift spike upwards to a high of 1.19 which was as quickly followed by a sharp drop to an intraday low of 1.1762. A rally but not so fast?
The chart shows a period of consolidation since mid-June largely within 1.17-1.20 range. The 6 and 21 days moving averages are about to cross giving us a bearish signal. But we know that MA are not very reliable in a sideway trend.
On the upside we can see first line of resistance just below 1.19 mark. It tried to break that yesterday but failed. Bulls could have another go and if successful they will be looking to breach above the recent high of 1.20 reached on August 18th. On the downside, sellers need to breach rather strong support around 1.1775 followed by 1.17. If they manage to do that the short-term trend will shift to bearish.