US Dollar value spikes following Fed chairman’s grave predictions
US dollar grew in demand on the European market on Thursday (May 14), risk avoidance reigned following the US Fed Chairman Jerome Powell's grave projections for the nation’s economic growth and his exclusion of a possibility that interest rates would go into negative territory.
At 2:55 AM ET (0655 GMT), the US Dollar Index, which tracks the US currency against a basket of six of its peers, stayed at 100.37, up 0.1%. EUR/USD dropped 0.1% to 1.0807, while GBP/USD fell 0.3% to 1.2187.
Chairman Powell proclaimed to be on the side of policymakers, denying negative US interest rates in a webcast on Wednesday (May 13). He additionally promised to utilize the US national bank's power as needed, however he pointed out that it probably won't be sufficient to avoid profound damage to the economy without additional financial support from the government.
The market is still poised for the Effective Fed Funds rate to a dip into the negative in 2021, “but his comments could stop the market from pricing an even lower Fed Funds rate,” said analysts at Danske Bank.
The aforementioned additional monetary support may actually be quite difficult to pass through Congress. A few days ago, House Democrats proposed another COVID-19 economic relief bill charge, worth around US$3 trillion, which outlines funding for state and local governments as well as additional direct payments for American citizens. Be that as it may, the Republicans have dismissed the efforts.
The upcoming weekly report of unemployment claims, due at 8:30 AM ET (12:30 GMT), is likely to show the necessity for government stimulus, with first-time benefit claims expected to reach 2.5 million people. This would push the number of individuals asking for benefits to over the 35 million, since the start of COVID-19 crisis in the US.
Also this week, Goldman Sachs analysts reexamined their estimates for the peak US jobless rate to 25%, up from 15%. April’s official rate came in at 14.7% a week ago. Unemployment levels were highest the poorest areas of the nation. Chairman Powell said that nearly forty percent of families with salaries under US$40,000 a year, had lost their jobs, as indicated by Fed data.
Aside from the greenback, the other major currency to see growth as a result of the market’s tendency to risk aversion has been the Japanese yen. JPMorgan Chase stated that they see the potential for the currency’s continued stability ahead.
At 02:55 AM EST, USD/JPY exchanged 0.1% lower at 106.86.
“We now see the risk of multi-year yen appreciation,” analysts at JPMorgan said, in a research note. “We expect the yen depreciation era (a sustained period of substantial yen depreciation in real terms) started by Abenomics to end.”
The bank underlined the arrival of deflation as a growing worry in Japan, as well as a slowing of record outflows of portfolio capital as Japanese fund managers go up against much lower bond yields across the border. Moreover, Japan's trade balance may receive a lasting boost from the slump in oil prices.
In other Forex news, the British pound tumbled to a seven-week low in the midst of developing worries that the Bank of England will also be compelled to fall back on negative rates. Fears of a hard Brexit at the year's end, following the deadline for the current transition period, are also taking their toll on a nation that currently has the most highest fatality rate from COVID-19 in Europe.