News & Analysis

A Cautious Fed

June 12, 2020

By Deepta Bolaky
 @DeeptaGOMarkets

A Cautious Fed

FOMC Meeting

Investors were eagerly looking forward to the Fed’s statement and forecasts for clues on how the Fed is viewing the health of the economy after easing lockdown measures. Global central banks have played a crucial part in absorbing the pandemic-induced shocks in the global economy. Together with huge fiscal intervention, central bankers have swiftly deployed various monetary tools to keep credit flowing and provide support to businesses and households.

Dot Plots

Even though the financial conditions have improved from the support of the policy measures that was put in place, the Fed highlighted that the ongoing health crisis will continue to weigh on the economic activity, employment, and inflation in the near- term and may pose considerable risks for the medium-term outlook. On Wednesday, the Fed decided to maintain the target range for the federal funds rate at 0 to 0.25%.

“The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

Most importantly, market participants took note that the US interest rates will stay near to zero through 2022, ruling out the probability of raising rates anytime soon and a V-shaped recovery for the US economy.

Economic Projections 

The Fed refrained from providing any forecasts during the pandemic given the tremendous uncertainties about the economic outlook. Much attention was, therefore, on the interest rate and economic forecasts.

  • Gross Domestic Product: The Fed is expecting a contraction of 6.5% in 2020, followed by an expansion of 5% in 2021 and 3.5% in 2022. 
  • Unemployment Rate: The outlook for employment is also gloomy. After the US labour market experienced its worst monthly drop in history, the Fed is forecasting that the unemployment rate will reach a high of 9.3% by the end of 2020.
  • Inflation: The Fed sees anaemic inflation which will remain below the target rate of 2% for the next three years.

The Long Road to Recovery 

Markets are taking note of the long road to recovery following the FOMC meeting. US stocks retreated as the Fed’s comments and forecasts show that they will continue to loosen monetary policy. Shares in Asia also struggled to edge higher following a cautious Fed on Thursday.   

World Equity Indices (% Change)


Source: Bloomberg Terminal

As of writing, the US and European stock futures slumped in the wake of the Fed’s decision.

Gold

A dovish-Fed have pushed the precious metal to a high around the $1,740 level. Gold has been trading sideways within a $70 range amid the reopening of economies, geopolitical risks and a weaker US dollar as traders were waiting for the next biggest catalyst.

 

By Deepta Bolaky
 @DeeptaGOMarkets


Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice. For more information of trading, check out our forex trading courses.

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By Deepta Bolaky
 @DeeptaGOMarket

EU Recovery Fund

After a standoff between the EU and Germany, following a critical ruling on ECB’s quantitative easing program by Germany’s constitutional court, the gradual reopening of economies of member states within the Eurozone has brought some optimism.

The downside risks for the Eurozone and its shared currency have somewhat eased on the fact that Europe, which was the epicentre of COVID-19 after China, might have gone through the worst phase of the pandemic. The sentiment for the Euro was also buoyed by the EU Recovery fund proposed by Chancellor Angela Merkel and President Emmanuel Macron to help Europe’s mostly hit countries.

Unfortunately, the optimism over the coronavirus fund proposal, which aims to show unity in overcoming the crisis and to achieve quicker economic recovery, was short-lived.

Europe’s Frugal Four 

Amid an unprecedented crisis, the Franco-German proposal was to provide support and reinforce EU financial relations and show that Europe is standing together. Austria, Denmark, the Netherlands and Sweden, dumbed as the “frugal four” put forward a counter-proposal that highlights the diversion of opinions in helping the Southern members states.

Grants or Loans

The Franco-German proposal is about “overcoming the crisis united and emerging from it stronger”. Both leaders proposed to make outright grants to help countries in need. They want to launch a temporary fund of 500 billion euro for EU budget expenditure:

“This would not provide loans, but rather budget funding for the sectors and regions hit hardest by the crisis. We firmly believe that it is both justified and necessary to now provide funding for this from the European side that we will gradually deploy across several European budgets in the future.”

In contrast, the frugal four wishes to provide loans rather than grants to southern European countries and expect the recipients of loans to comply with the fundamental principles of the EU and commit to strong reforms in repaying the loans. Their two-year and “one-off” proposal appears to also outline how those countries should use the funds and target sectors that are mostly hit based on an assessment.

The coronavirus pandemic is testing the solidarity of European members and is threatening to reawaken a euro crisis. Southern countries like Greece, Italy and Spain lacked the fiscal space they need to put forward an economic stimulus package to support their economies, compared to Northern countries. 

Disparity? Compromise?

Both proposals are saying “yes” to emergency aids to assist with recovery, but the disparity lies on how the funds will be financed to respond to the economic wreckage. The size of the emergency fund, the conditions of the funds or whether it will be grants or loans will be a compromise the markets are expecting to see. However, the type of compromise might be a key factor in determining the relationships of EU members.

Unprecedented times probably need unprecedented Unity.

Euro – The Shared Currency

The fact that Europe may have gone through the worst phase of the coronavirus has somewhat eased the downside risks of the shared currency. But the current geopolitical tensions with China and uncertainties on the EU Recovery plan are putting a lid on the upside momentum of the Euro.

After the sharp plunge in March, the EURUSD pair has been trading within the 1.08 to 1.09 range. Yesterday, the better-than-expected IFO Surveys in Germany has helped the pair to hold ground and hover around the 1.09 level. The recovery plan could mitigate the selling pressure and allow a probable move above 1.10 level if there is a compromise that satisfies the frugal four.

EURUSD

Source: Bloomberg Terminal

The immediate attention turns to the European Commission which is supposed to unveil a draft recovery plan on May 27th, 2020.

By Deepta Bolaky
 @DeeptaGOMarkets

Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice.

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