The US is ready to impose sanctions on China regarding the spread of the coronavirus.
US Senator Lindsey Graham revealed yesterday that he submitted proposals for a bill that would authorize the US president to impose far-reaching sanctions on China if it fails to give a full account of events leading to the outbreak of the coronavirus. The senator said that the Chinese authorities have acted by deceit to conceal the real source of the outbreak, and by all means prevented the international community from conducting an investigation in a laboratory in Wuhan. The bill is not surprising, as eight more Republican senators have already supported it. It sets aside two months for the Communist Party to provide a full report on the causes of the pandemic, as well as the release of all activists detained in Hong Kong after the pandemic. No official response has been received from the Chinese authorities so far.
The US government also appealed to the Federal Reserve System to change its lending program, partially directing funds to help oil companies, which are now most vulnerable to the crisis, due to the collapse in oil prices in March-April. Energy Secretary Dan Brouillette said that Finance Minister Steven Mnuchin worked very closely with the Federal Reserve to reach a consensus in adjusting the lending program to provide credit for the energy sector. The oil market did not react to this news, and WTI quotes remain in the area of correctional highs and sell resistance at $ 26 per barrel.
The euro rose yesterday amid the weak US inflation data, which turned out worse than economists’ forecasts. The report partially weakened the US dollar, but only against the euro, as a significant increase was observed in USD against the pound. The reason of the increase was not the strength of the dollar, but the weakness of the pound itself in relation to important fundamental statistics that are scheduled to be published in the morning.
The report of the US Department of Labor indicates that inflation may start from the lows this year, but will probably take some time to reach the Fed’s target level of about 2% and stabilize at it. The main reason for which is the weak demand that will continue even after the lifting of the quarantine restrictions, which will be the beginning of economic recovery in the 2nd quarter of 2020.
The measures in the US do not exert serious inflationary pressure, since the money is aimed at saving companies, not at their development and investment.
A 0.8% decline was recorded in the CPI in April this year, due to the coronavirus pandemic, and the sharp decrease in oil prices. Low prices of airline tickets, cars, goods and services also pulled down the index. Core inflation, on the other hand, is quite positive. Excluding volatile categories, the consumer price index fell 0.4%, which is the minimum recorded since 1957.
The growth of the US budget deficit also put pressure on the US dollar. According to the report, the budget deficit has grown to $ 1.935 trillion, due to the increase in US government spending and tax cuts, which affected budget revenues. According to the US Treasury Department, budget spending rose to $ 979.71 billion in April 2020, directly related to the allocation of credit to save companies and households that suffered from the pandemic. Budget revenues fell to $ 241.86 billion, and the budget deficit in April decided to $ 737.85 billion. The US Congressional Budget Office announced that by the end of the fiscal year, the budget deficit could amount to more than $ 3.7 trillion.
Data on the optimism of small businesses in the US are also disappointing. The report published by the National Federation of Independent Businesses revealed that the index fell from 96.4 points in March to 90.9 points in April 2020, worse than economists forecast of 83.5 points. However, the fall could have been much more serious if not for the lending programs provided by the US government. Of the 10 sub-indexes, 9 immediately decreased.
The report in US retail chains, on the other hand, did not affect the market, as the values have been expected already. According to the data published by The Retail Economist and Goldman Sachs, the index of sales in US retail chains grew by 1.0% over the week of May 3-9, but over the same period last year, collapsed by 17.5%. Meanwhile, the Redbook report recorded a 1.5% drop in retail sales for the first week of May, and a 7.5% decline in year on year.
Fed representatives made speeches yesterday, speaking about the need for further measures to support the economy and inflation.
According to James Bullard, the Fed’s actions to support the market worked quite well, but negative interest rates are not a good option for the US. In his opinion, if the Fed needs to increase stimulation, the best option would be to increase QE. As for inflation, there are no risks of its rapid growth so far, and the goal of about 2% remains the key objective of the Fed.
Fed spokesman Patrick Harper said that the economy’s return to previous growth rates will be uneven, as the financial system remains vulnerable during the recovery period. According to him, a premature launch of the economy can do huge harm, because until the outbreak of the coronavirus is controlled, the economy will remain weak.
As for the technical picture of the EUR / USD pair, trading continues to be carried out in the side channel. Bulls need to break yesterday’s highs and get above the resistance level of 1.0880 to remove sellers stops and push the pair up to the levels of 1.0930 and 1.0980. Bears, meanwhile, need to return the euro to the level of 1.0825, to push the EUR / USD pair to the lows of 1.0770 and 1.0700.