Fed Budget Deficit Expansion
- US treasury reported on 13 July that the budget deficit has reached an all-time high of $864 billion in June, primarily due to stimulus programs for small businesses. Current fiscal and monetary policies coupled with COVID-19 cases continuing to surge may indicate weakness in the dollar.
China exceeds GDP forecasts in Q2 2020
- China released its GDP data for Q2 of 2020 on 16 July – which grew 3.2% more than the same quarter last year. Industrial production rose by 4.8% while unemployment dropped from 5.9 to 5.7%. While these figures indicate strong economic recovery, current consumer confidence is still low with retail sales continuing to contract by 1.8%.
EU Brussels Summit
EU leaders have gathered to discuss the $750B pandemic recovery fund and the new 7-year budget on 17 July. No census on the outcome could negatively impact the Euro with investors hoping for stimulus packages.
What is driving the USD down? Economic Recovery and a potential vaccine vs Signs of a Faltering Recovery
There are now over 3.6 million confirmed cases in the U.S., along with an increasing rate in the number of infections, which has led to the shutdowns in multiple states across the country. But stocks continue to rally. One may speculate that recent news about the development of vaccines from companies such as Moderna, Pfizer and BioNTech have supported the narrative about the U.S. economy recovering, but the lack of a significant spike in the market suggests these outcomes have already been priced in.
Interestingly, the U.S.’s recent move to treat Hong Kong as mainland China has had little to no impact on the markets – usually, such geopolitical tension would boost the US dollar. While optimistic sentiments continue to boost stocks, it is important to pay attention to economic indicators, such as manufacturing indexes, jobless claims, and the performance of large market-cap firms, to determine whether the narrative will shift or not.
AUD/USD – Bullish
One can expect the price of the Aussie to be stable, staying within support and resistance levels of 0.691 and 0.705, especially if the performance of tech firms like Microsoft, Twitter and blue chips like Coca-Cola and Verizon conform to or exceed forecasts. These figures will verify whether the markets will continue to support the narrative of a sustained global economic recovery, hence providing a slightly bullish outlook to the Aussie.
NZD/USD – Bullish
Based on the fact that China has experienced a strong bounce back in economic growth, NZD pairs are also likely to perform well. Continuing the uptrend, we could see a test of the level of 0.66801. However, NZD/USD is currently at high timeframe resistance with bearish divergence on the daily which could see a retest of prior support between 0.64291 and 0.63990 in the short term.