- February 13, 2020
- Posted by: Amit Pabari
- Category: Economy
Globally, a new calm in the capital markets continues with Federal Reserve Chairman Jerome Powell taking the centre stage. Investors are finding relief from reports that the spread of new coronavirus at ground zero, the Hubei province, is slowing. However, it’s too early to assess the economic impact of the coronavirus-led shutdown. The key factor will not be the epidemic’s range or severity, but rather its duration. The sooner the epidemic is over, the quicker China’s economy will recover and the damage shall be shortlived and seen in the current quarter’s data release.
After DXY touched the year’s high near 98.90 levels, most of the major currencies rebounded against the US dollar due to pullback in demand of US bonds and new record highs for US equities. Attention will now turn to Powell who is due to testify before Congress for the second day today. His testimony comes at a key junction for the US economy — it leaves behind a trade dispute with China and the Fed battles low inflation but a solid labour market. Powell feels that the economy is in a good place, fundamentals supporting household spending are strong and while the coronavirus-driven slowdown in China is likely to have some effects on the US, it is too early to say what the impact will be. The central bank is monitoring risks to their outlook closely but for now, monetary policy remains appropriate. However, impact on DXY shall remain neutral to bearish as the index is highly overbought and some consolidation could be seen hereon.
GBPUSD rebounded following the release of GDP data. On an annual and monthly basis, economic growth beat expectations; however, on a quarterly basis, the economy failed to grow. Going ahead mixed data prints could change over the coming months, as optimism has improved considerably following December’s general election.
On the Brexit front, European Commission President Leyen responded to British PM Boris Johnson’s words about his desire of a Canada-style deal, indicating that, given the “unique” level of access the UK would have to the EU market, the UK must stick to tough rules to prevent any harm to the EU economy. EU chief negotiator Michel Barnier warned UK leaders not to hope, as Brussels won’t give a special deal related to financial services. Hence, political uncertainties and optimism on the economic front shall keep GBP trade on neutral tone and within a range of 1.2880-1.3050 levels.
Unexpected threats to Eurozone
The ECB’s policy meeting in January revealed that a rate hike isn’t on the horizon. It also implied its awaited strategic review won’t deliver anything meaningful, at least until the policy meetings due in the coming months. European Central Bank President Christine Lagarde spoke before the European Parliament’s plenary session, but she referred to moderate growth and inflation below medium-term target. And while the fiscal stimulus wasn’t really expected any time soon, the list of unexpected threats to the Eurozone has widened. Political troubles have resurfaced in the bloc, with German politics entering a period of turmoil, risk of the US imposing auto tariffs on European imports, and the prospect of difficult talks between the UK and the EU over a trade deal. All of these shall keep the EUR in check and going further, the pair is likely to trade between 1.0880-1.0980 levels.
Domestically, the range of rupee is getting narrower with each passing day with volatility drying up to its lowest in the last couple of months. FPI’s are selling dollars to buy Indian stocks and bonds, corporates are selling dollars to convert their FDI investments and foreign currency debt inflows and even the trader is selling dollars to play carry trade. The irony is, the pair is still holding above support of 71.10 as all of these flows are absorbed by the RBI to build reserves. Hence, we see USDINR opening down with a gap and within the day the RBI is gradually lifting the pair up.
Going ahead, the pair is likely to consolidate within its narrow range of 71.10-71.65 levels until any major news triggers a breakout on either side; as the RBI is holding the pair on the downside and upside losses are capped due to sustained inflows.
Amit Pabari is the MD of CR Forex Advisors.