The U.S. Dollar is having its worst month in years, but markets will be focused on potential sanctions on China from Trump Administration, writes Adam Button.
The euro (EUR/USD) finally cut through resistance in the 1.1000/20 zone on Thursday as the euro led G10 FX. The U.S. Dollar Index is on course for its biggest monthly fall of the year. The Canadian and U.S. dollars were the laggards as risk trades dipped late on China worries.
The thinking in the market at the moment is that economies are opening up and that the Coronavirus isn't so dangerous after all. There are reasons to doubt that and to fear a second wave but that's clearly the mode the market is in. And let's not forget the bigger than expected €750 billion ($830.8 billion) loan package from the EU, whose initial announcement coincided with EURUSD's first jump.
US markets staged a remarkable rally, but EU has more upside ahead. Italy's MIB is just testing the 38.2% Fibonacci retracement of the pandemic fall and that comes after a week of strong gains. If everyone is going to open up and recover, then the catch-up trade is outside the United States. Needless to say, there are undoubtedly differences because the Eurozone doesn't have the same fiscal capacity but at the same time, debt monetization is a lower risk.
On net, European stock markets are better value right now than U.S. markets if you assume a full reopening. Again, it would be easy to make arguments against that statement but that's where the market is at for the moment and it's what finally boosted EUR/USD above 1.10.
The pair rose as highs as 1.1093 before a sag late in the day. Risk trades were hit and stock markets reversed into negative territory when President Trump said he will announce something on China Friday, presumably some kind of retaliation for the Hong Kong security law. All evidence points to some ineffectual sanctions against individuals and companies but Trump is unpredictable and this is a chance for him to flex his “tough on China” muscles ahead of the election.
There's no set time yet for the press conference and there's a high risk of leaks. The day will also feature the April US PCE report and the focus will be on spending, which is forecast to contract by 12.7%. Federal Reserve Chair Jerome Powell will also speak. This is his last opportunity to send a message ahead of the blackout period and given the positive tone in markets, the risk is that he dampens expectations for future FOMC action.
Adam Button is co-owner and managing director of ForexLive.com and a contributor at AshrafLaidi.com. You can see Ashraf’s daily analysis at www.AshrafLaidi.com and sign up for the Premium Insights. Ashraf's Tweet on indices here.
