Uncertainty Drives US Dollar Lower and Euro to 1.5 Year Highs

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Uncertainty Drives Dollar Lower and Euro to 1.5 Year Highs

Daily FX Market Roundup July 22, 2020

Uncertainty about what happens to the US economy after the extra $600 unemployment benefit expires drove investors out of US dollars. The greenback traded lower against all of the major currencies except for the Japanese Yen. This recent decline drove EUR/USD to its strongest level since October 2018 and USD/CHF to its weakest level since March. The Australian and New Zealand dollars also climbed to multi-month highs versus the greenback.

Part of the weakness can be attributed to US existing home sales, which rose less than expected in the month of June with house prices falling in May. According to CNBC, while July 31st is the expiration date for extra benefits according to the CARES Act, all states will stop paying after July 25 or 26 due to administrative calendar they use to pay aid unless Congress passes legislation to extend the aid. So far there has been no talk of extending that deadline to cover the end of the month. Instead, federal lawmakers are focusing on another coronavirus relief package that would continue some type of supplement. Once unemployment benefits expire the pressure on the government to cut a deal and avoid cutting short the recovery will increase exponentially. As a result the dollar will take its cue from stimulus headlines.

As investors wait and see what type of stimulus the US government comes up with, they are still reeling from the powerful economic relief package passed by the EU on Tuesday. This groundbreaking deal will go a long way in averting a coronavirus recession and sheltering the Eurozone economy from further weakness. The recent rally in euro is a reflection of the market’s confidence and optimism that with this package, the Eurozone will fare better than the US in coming months. The EU also plans further changes to financial regulations that should help support the markets. Technically, key resistance for EUR/USD doesn’t come in until 1.17 although 1.16 is a level to watch. Sterling ended the day unchanged but this steady price action masks a stronger intraday recovery. GBP/USD dropped as low as 1.2645 before ending the day well above 1.27. No UK economic reports were released today and Brexit talks are still slogging along but sterling benefitted from the UK’s control of COVID-19 and the prospect of stronger retail sales on Friday.

All three commodity currencies traded higher against the greenback but the biggest milestone was reached by the Australian dollar which rose to a 15 month high versus the greenback. The New Zealand dollar hit a 6 month high while the Canadian dollar rose to a 1 month high. Stronger inflationary pressures contributed to the rise in the loonie but the primary catalyst for CAD’s gains was US dollar weakness. CPI increased 0.8% in July against a 0.4% forecast – while encouraging, higher prices won’t push the Bank of Canada closer to tightening as year over year CPI hovers near 1.1%. Many of these currencies are getting overextended but their rallies should remain intact until there’s unambiguously positive US news.

Kathy Lien
Managing Director

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