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Contrary to market expectations on Wednesday, Fed Chairman J. Powell made it clear that the recovery of the US economy due to the coronavirus pandemic and the likely new second wave of the spread of infection will not be quick.
Earlier, investors, arguing about what topic Powell would discuss on, assumed that he would touch on the impossibility of lowering interest rates to negative values, as is currently observed in Japan and the eurozone. It was assumed that he will try to be optimistic in general, although, of course, he will talk about the problems of the influence of coronavirus infection on the US economy in particular and on the world as a whole. But the content of his article was more pessimistic. The main topic of which was the phrase about the "long period" of weak growth and stagnant income. Yes, he will slightly talk about the topic if it was necessary to expand the use of the potential of the Fed, as well as budget expenditures, but this could not smooth out the negative message, the meaning of which was that one should not expect a V-shaped way out of the crisis, which everyone had hoped for before.
If the US economy, and with it the world economy, starts to cease amid fears of the second wave of COVID-19, which will restrain the recovery of economic activity, this will strengthen the effect of destruction and lead to a significant decrease in living standards in the States and other rich countries. If the recovery really takes a U-shape or, worse, an L-shape, then in this case you really should not hope for an increase in demand for commodity and raw material assets, as well as a significant recovery in stock markets. Nevertheless, we continue to be optimistic, believing that humanity will still have to start active business, with coronavirus innovations, until a vaccine or cure for COVID-19 is invented.
Given the general negativity of market sentiment, we believe that we should not expect renewed demand for risky assets this month, but we also do not expect markets to collapse. But there is a high possibility that they will suffer a state of stagnation. Investors will closely monitor the dynamics of the pandemic, the progress in the invention of a cure for this infection, which will lead to sharp movements either up or down.
Most likely, the general prolonged period of stagnation will continue in the currency market, which will manifest itself in the consolidation of currency pairs over wide ranges. In addition, activity will most likely noticeably decline. This is due not only to the uncertainty factor, but also to the approximately equal weakness of both the dollar and other major currencies in the wake of economic problems in the countries to which they belong and the actions of monetary authorities related to all kinds of incentive measures.
Forecast of the day:
The EUR/USD pair continues to consolidate, while forming a figure of the continuation of the trend of the "rising flag". If negative moods continue today and the pair drops below the level of 1.0800, it is likely that it will drop to 1.0765, and then, possibly, to the level of 1.0725.
The AUD/USD pair is under pressure in the wake of falling demand for risky assets. If it consolidates below the level of 0.6440, it will continue to decline to 0.637
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