US Dollar Analysis, Fed Chairman Jerome Powell, Coronavirus, EUR/USD, OPEC, EUR/USD – TALKING POINTS

  • US Dollar could rise at expense of equity markets if Powell testimonies pour cold water on optimism
  • Brent anxiously waits for OPEC meeting – will extended supply cuts be enough to support crude oil?
  • Political risk may be the biggest driver of price action in Euro crosses: EUR750b aid package in focus

US Dollar, S&P 500 Focus on Powell Testimonies

The US Dollar may rise at the expense of the S&P 500 following Fed Chairman Jerome Powell’s congressional testimonies this week. He will be giving his outlook and answering questions first from the Senate Banking Committee on Tuesday and then the House Financial Services Committee on Wednesday. The first testimony – where the contents of his speech and outlook are unknown – may generate higher-than-usual volatility.

Price oscillations could also be amplified by the subsequent Q&A after every session which will likely vary by policymaker and committee. At last week’s FOMC meeting, the Fed made it clear that it will hold interest rates near zero until 2022 and will use the widest set of tools at its disposable to counter the economic fallout. You can read more about it here.

In his press briefing, Mr. Powell noted that the road to recovery in the labor market will be “long” and unpredictable, and he underscored the importance of medical metrics as key data to monitor. This comes to no surprise: fiscal and monetary authorities will adjust stimulus measures in accordance to the impact the virus has on public health and the necessity to restrict non-essential activity.

OPEC Publishes Monthly Report, Key Officials Meet

While crude oil prices may get hit from the Powell testimonies, the gradual reopening of economies and signs of coordination among the Organization of Petroleum Exporting Countries (OPEC) could boost Brent. Last week, the oil cartel agreed to extend record-low cuts to production into July at 9.6 million barrels per day. The group also implemented stricter compliance measures to ensure uniformity in supply cuts across members.

The production-cutting policies are aimed at helping to buoy prices that have been hammered by the recession-inducing coronavirus pandemic. Saudi Energy Minister Prince Abdulaziz Bin Salman struck an optimistic tone recently amid easing government-mandated shelter-in-place orders, saying that: “Demand is returning as big oil-consuming economies emerge from pandemic lockdown”.

While the cuts may initially bump crude oil prices higher, political cohesion within OPEC and adherence to the supply cuts are crucial. If investors pick up on internal fragmentation, crude oil may face heightened liquidation pressure from the prospect of intra-organizational conflict. The last time this happened was during the OPEC meeting on March 6 when Russia and Saudi Arabia threw the gloves off and sent oil markets reeling.

Brent – Daily Chart

Chart showing crude oil

Brent chart created using TradingView

The cartel will meet again on June 18 where policymakers in the Joint Ministerial Monitoring Committee will decide on whether it will be necessary to extend production cuts all the way into August. However, while the prospect of such a move may initially push crude oil prices higher, the underlying problem of a weak demand remains unresolved. Tightening supply is half the problem – the other half is getting people to buy it.

Consequently, how the economy reopens and whether a reactionary lockdown is implemented to contain a second spike has significant implications for crude oil. Were the latter to occur, Brent and petroleum-linked assets would likely suffer and erase the gains they recently acquired. In that situation, OPEC may then need to implement more aggressive supply cuts which could in turn raise the prospect of internal friction.

Euro Braces for EUR750b Aid Package

The Euro will be at the mercy of a crucial political debate over the European Commission’s proposed EUR750b aid package. The stimulus measure is divided into two parts: 500b would be given in the form of grants to sectors and economies hit hardest by Covid-19, and the remaining 250b would be distributed through loans. You can read more about it here.

Hope about the aid package helped propel the Euro and regional equities higher and simultaneously push the yields of sovereign bonds issued by structurally-distressed states – particularly in the south – lower. While the proposal does not necessarily represent more debt mutualization than has been allowed before, its implementation would increase fiscal integration and could help flatten structural asymmetry embedded in the currency union.

That in turn could lessen the prospect of another sovereign debt crisis and lower borrowing costs for Mediterranean states in dire need of reform and a boost to economic activity. The proposal will still need the approval from the leaders of the 27 EU member states who will be meeting to discuss it on June 19. Political friction there could have severe implications across regional assets classes.

EUR/USD Analysis

EUR/USD’s remarkable ascent may be coming to an end after it failed to extend its gains just before retesting the multi-month swing-high at 1.1447. The pair just broke below a familiar inflection point at 1.1287, potentially setting EUR/USD up for an accelerated retracement. Selling pressure may starting abating at 1.1147, though clear that too could inspire additional sellers to enter the market.

EUR/USD – Daily Chart

Chart showing EUR/USD

EUR/USD chart created using TradingView

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

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





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