US Dollar May Rise on Powell Testimony, FOMC & ECB Minutes: Covid-19 in Focus

FOMC Minutes, Powell Testimony, ECB Minutes, Fed Negative Interest Rates, China National People’s Congress – TALKING POINTS

  • US Dollar could rise on Powell, Mnuchin testimony to Senate Banking committee
  • Euro may face heightened liquidation pressure on ECB minutes, political wounds
  • British Pound haunted by Brexit, Covid-19, BoE alluding to using negative rates

POWELL TESTIMONY, FOMC MINUTES

The US Dollar may rise following Fed Chairman Jerome Powell and Treasury Secretary Steven Mnuchin’s congressional testimony in front of the Senate Banking Committee on Tuesday. The recently-passed CARES Act requires quarterly updates to Congress on the status of the economic programs. This was implemented as a way to maintain transparency and allow for greater government oversight.

Mr. Mnuchin and the Fed Chairman will have an interesting testimony, considering the latter strongly pushed for bolder fiscal spending in an interview last week while the former advocated for a wait-and-see approach. The Treasury Secretary said the White House will do whatever it takes to provide economic aid, but will do so cautiously, stressing the need for allowing the stimulus to sink into the economy before providing more.

He also said the White House remains committed to including a payroll tax cut in a future relief bill, though the effectiveness of such a measure is unclear considering how many jobless people there are out there. Some House Democrats have pushed for another stimulus package amounting to around $3 trillion, though it has been met with resistance from Senate Republicans.

Amid the uncertainty in the fiscal tug of war that is embedded in an already fundamentally-unstable environment, the policy ambiguity there could push the US Dollar higher if demand for havens rises. This dynamic may also be amplified by Jerome Powell’s reiteration of the Fed’s stance against the use of negative interest rates. See his commentary from last week.

ECB MINUTES, EUROPEAN COMMISSION POLICY RECOMMENDATIONS

On the other hand, the Euro may face heightened liquid pressure ahead of the publication of the ECB meeting minutes and the release of the European Commission’s policy recommendations for member states. Last Friday, central bank President Christine Lagarde said monetary authorities are committed to doing everything needed within their mandate, and will do more if it sees that the current stimulus efforts are falling short

This came after preliminary Eurozone Q2 GDP data printed the first contractionary figure since 2013, during what was then a regional debt crisis following the shock from the 2008 financial meltdown. Political wounds from then are arguably more aggravated now as underlying structural weaknesses continue to hamper growth-stimulating policies, amplifying intra-regional political fragmentation.

This has been frequently shown to significantly hurt the Euro, as in the case with the Italian budget crisis in 2018 and into 2019 and the resurrection of a familiar regional tension between North and South in 2020. The European Commission will be publishing its policy recommendations for member states. If the measures are revealed to be unexpectedly strict, the implementation of them could lead to a prolonged recession.

CHINA’S PEOPLE’S CONGRESS ASSEMBLES

This week, China’s People’s Congress will be assembling – albeit delayed due to Covid-19 – to discuss growth targets for 2020. However, policymakers will have to walk a fine line, as too-high a growth target could be viewed as unrealistic, and an underwhelming forecast could sap confidence (Bloomberg). Officials will also have the chance to address US President Donald Trump’s recent grievances against China amid the pandemic.

Renewed tension between Beijing and Washington may amplify risk aversion and help drive the US Dollar higher in an environment that is already putting a premium on risk-oriented assets. Inflammatory rhetoric from Chinese officials could raise the prospect of targeted policy measures against China. As history has shown, Beijing will likely retaliate and shaky market optimism may then crumble at the feet of the Greenback.

BREXIT FEARS RETURN, HAUNTING BRITISH POUND

The British Pound may also face higher-than-usual selling pressure as it now has to contend not only with eroding fundamentals due to Covid-19, but resurrected Brexit fears. Last Friday, the EU’s chief Brexit negotiator Michel Barnier said he is not optimistic about ongoing talks, while his UK counterpart David Frost echoed a similar sentiment, saying that very little progress had been made.

The politically-sensitive British Pound has been at the mercy of intense Brexit talks for two years amid delayed deadlines, elections, emergency summits and other forms of governmental musical chairs. This is not including the additional pressure from the Bank of England, with officials there saying they are looking more urgently at implementing negative interest rate policies.

GBP/USD TECHNICAL ANALYSIS

GBP/USD recently broke below the lowest tier of the 1.2156-1.2283 support range with follow-through, opening the door to retesting the floor at 1.1754. This penultimate level may be the last line of support – as it were – before GBP/USD retests the 1985 swing-low at 1.1452. Breaking below that with another daily close could precipitate an aggressive selloff into unknown territory

GBP/USD – Daily Chart

Chart showing GBP/USD

GBP/USD chart created using TradingView

— Written by Dimitri Zabelin, Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitriTwitter