“One step forward, two steps back” – this is how you can describe the dynamics of the euro-dollar pair in recent days. The growth of EUR/USD is extremely difficult for buyers – they have been testing the eighth figure for four trading days, but they can not get a foothold in this price area. The price retreated during the US session, and then the bulls again had to conquer the unyielding height. Nevertheless, the overall result remains for the single currency: the pair plunges into the seventh figure less often, not to mention lower values. The pair is gradually recovering its positions with deep price reversals, despite the rather contradictory fundamental background.
The dollar has been between the “rock and the hard place” for several days now. On the one hand, the greenback is under pressure from the latest actions by the Federal Reserve. Initially, the regulator announced a quantitative easing program worth $700 billion, but after a few days it canceled the threshold and made this program unlimited in amount. Jerome Powell also announced the opening of credit lines for corporations and US local authorities. At the same time, the Fed chief noted that current purchases of US Treasury and mortgage securities will be expanded “as much as necessary.” In addition, the Fed opened dollar swap lines with the ECB, the Bank of England, the Bank of Japan and nine other central Banks of the leading countries of the world.
Such generosity of the US regulator and the saturation of dollar liquidity have reduced the excitement around the greenback. Nevertheless, the market still uses it as a protective tool, so the bulls of the EUR/USD pair were not able to take full advantage of the situation. In addition, today it became known that the US Senate will still vote for a package of economic measures for $2 trillion. At least, according to Senator Mitch McConnell, the White House and the Democrats have come to a compromise and are ready to make an agreed decision. Therefore, at the end of today’s US session or in the midst of the Asian, we should expect a market reaction to the actual adoption of this document by congressmen.
And although this fact is already largely taken into account in prices, dollar bulls are unlikely to ignore such powerful state assistance to the US economy. The bill provides for prompt payments, which should help Americans pay bills in the event of dismissal during the epidemic, expand unemployment payments and allow emergency loans to small businesses. In addition, a stimulus package will support the economy by providing large-scale assistance, which will include $500 billion to support the most affected sectors through loans.
This is very useful, since the United States, apparently, will become the new epicenter of the coronavirus pandemic. At least this assumption was voiced by the World Health Organization. The United States is actively catching up with Italy in terms of the number of infected people – last night the number of infected Americans crossed the 50,000th mark. The virus claimed the lives of more than 600 Americans.
But in the context of the foreign exchange market, a slightly different question is important – will the White House extend quarantine measures in the country or not? Trump is still against tough decisions – moreover, he admitted that after three weeks his administration can cancel all quarantine measures. According to him, “treatment in this case is worse than the disease itself,” bearing in mind the economic consequences of restrictive measures. He was supported by many Republicans and some representatives of large business.
The essence of their arguments is quite simple: the collapse of the US economy can kill more people than the notorious Covid-19. In fact, large banks also joined Trump’s position, having calculated the possible losses. For example, according to preliminary estimates of Bank of America, the US economy will collapse by 12% in the second quarter, if quarantine measures last until the summer. Deutsche Bank predicts a decline of almost 13%, while Goldman Sachs – immediately by 25%. According to bankers, the labor market will lose around 5 to 8 million jobs – unemployment will increase significantly in the country and consumer activity will decrease. The representative of the Fed (President of the Federal Reserve Bank of St. Louis) James Bullard voiced more gloomy forecasts. According to him, over 45 million Americans may lose their jobs due to the epidemic (and, accordingly, quarantine measures), and the unemployment rate will jump to a record 30%. He also skeptically evaluated the package of incentive measures proposed by the White House – according to him, the state program will bring only “temporary relief”, but no more. However, he did not rule out the application of additional measures by the Fed.
Thus, economists have voiced strong enough arguments in favor of easing or completely abolishing restrictive measures in connection with the coronavirus. However, doctors, virologists, and other specialized specialists give no less weighty arguments in favor of prolonging and strengthening quarantine. In their view, the peak of the epidemic in the United States has not yet arrived, so strict social isolation is vital. Otherwise, the worst case scenario could be implemented, according to which up to 100-150 million people will be infected with the US coronavirus. In this case, the death toll will increase to one and a half (according to other estimates – 800 thousand to 1.7 million) million people. Such prospects, of course, will hit Donald Trump’s political positions – just a few months before the presidential election.
Thus, the US president is now facing a very difficult choice. According to him, the decision to terminate quarantine will be based only on irrefutable facts and data. At the same time, he added that he was already seeing “a gap at the end of the tunnel.” However, the latest figures indicate that the end of this tunnel is still quite far away – the number of infected and dead is growing by the hour and not by the day. All this suggests that the White House will probably extend quarantine by a few more weeks in early April. This fact (even preliminary hints of a similar scenario) will put strong pressure on the US currency – this will allow the EUR/USD bulls to finally take the pair initiative, gain a foothold in the ninth figure and overcome the resistance level of 1.0940 (the lower boundary of the Kumo cloud on the daily chart).