Abstract: The U.S. Dollar Index looks weak while more twists and turns occurred in the stock market. Will gold and silver continue to dominate as a new stimulus package looms? EUR/USD mustered the most momentum from hopes of a significant EU recovery fund. GBP soared against the U.S. dollar amid stalled Brexit negotiations. The negative outlook for the Australian economy may hinder the Australian dollar.
- Gold and silver are expected to re-shine on new-stimulus bets >
- The U.S. Dollar Index has collapsed and its international standing is on the wane >
- EUR/USD gains momentum from the agreement on EU coronavirus recovery fund >
- Why the GBP is shining against the U.S. dollar in the face of tough Brexit negotiations? >
- Australia reported its huge budget deficit with ups and downs in AUD/USD >
When and how the new U.S. economic programs will be executed received high attention in the markets last week. The U.S. government plans to pump another $1 trillion into the markets to help the jobless and prop up crashing markets.
With that, the coronavirus relief plan will extend enhanced unemployment insurance "based on approximately 70% wage replacement," U.S. Treasury Secretary Steven Mnuchin said, suggesting that the $600 weekly enhanced unemployment benefit that expires on July 31st would be replaced by a reduced amount of around $100 or $300 a week. And the White House was to give out a "return-to-work" bonus of up to $450 a week for people who are willing to head back to their jobs. Meanwhile, Republicans preferred another round of direct $1,200 cash payments to Americans in August.
This led the Fed to pour money into the market, once again providing room for the safe-haven assets that had been soaring, such as gold and silver. As a result, gold surged to a fresh nine-year high last week, breaking $1,900 an ounce, to close at $1,900.6, up 5.07% on the week, as risk aversion from the U.S. and China intensified. Not to be outdone, silver closed at $22.76 an ounce, up 17.77% for the week.
In addition to the continuing focus on the new economic stimulus plan, the gold-silver ratio was also in the spotlight, which was currently at a three-year low of 83. Some analysts believed that the ratio could fall to 70 in the future, indicating that silver may outperform gold, and all investment decisions should be considered carefully.
The U.S. dollar came under heavy pressure last week as markets panicked about a new stimulus package and capital poured into gold and silver. The U.S. Dollar Index fell below 95, its lowest level in the past two years, closing last week at 94.345, down 1.74% for the week. Another culprit is the record numbers of new Coronavirus cases and the market's loss of confidence in the US government's pandemic prevention and control capability.
On Wall Street, stocks fluctuated on a surprise rise in jobless claims last week and the report on America’s 2020 second quarter financial results. The NASDAQ Composite, which has been a strong performer lately, erased three days of gains from last week, when it closed at 10461.42, down 0.12% on the week, Dow Jones at 26652.33, down 0.31% on the week while the S&P 500 at 3,235.66, up 0.67% on the week.
Noteworthily, market fears of a bubble in the Nasdaq-100 Index have resurfaced after it surged more than 50% from its March bottom and its price-earnings ratio rose to its highest level in 20 years, according to Bloomberg.
Key figures that will influence the U.S. dollar and stocks and be announced this week include:
1. Fed interest rate decisions and monetary policy, and whether to mention the yield curve control;
2. Annual GDP of the United States;
3. Personal spending and income data; and
4. Jobless claims.
They may have a direct bearing on the dollar and the stock market, which are worthy of vigilance.
In currency markets last week, the EUR/USD was laudable. A five-day European Union summit ended with an agreement on a recovery fund. And the European Parliament must approve the spending plan in the coming months to make it a reality and help pull the EU economy out of recession.
Nevertheless, the meeting boosted confidence in the euro so much that it managed to break $1.16 last week, its highest level in the past 18 months. The euro closed at $1.1656 against the U.S. dollar, up 2.02% on the week, with a bullish bias still ahead. As for its cause, on the one hand, EU countries are in the beginning stage of economic recovery, whose prospect is worth looking forward to.
On the other hand, the euro-zone pandemic prevention and control, though not optimistic, is better than that of the United States. Besides, the EU's 750 billion euro coronavirus bailout was a significant benefit to the euro zone's sovereign ratings, according to S&P Global.
In such case, could EUR/USD be shaken in the short term by the release this week of European GDP and CPI as well as European unemployment rate, which has been at 7.4 %.
There's still no good news from last week's Brexit negotiations, which have been held up by the UK’s current refusal to commit to conditions of open and fair competition and to a balanced agreement on fisheries. Britain's tough stance with the EU makes a deal harder.
Even so, the monthly growth rate increased by 13.9% for retail sales in June, beating market expectations of 8%. The improvement reflects the early results of the government's stimulus package. But consumer confidence remained weak in July and the government is preparing to phase out the wage subsidy from next month.
GBP broke 1.28 against the dollar for a fifth day this week on the back of improving UK retail sales figures and a weaker dollar. It closed last week at $1.2789, up 1.77% on the week.
In addition, Haskel, a member of the Bank of England, sounded a pessimistic note about the UK economy as reopening it too early would exacerbate the damage from COVID-19 but if not, unemployment was a major issue.
Whether the conflict between Britain and China over the introduction of a national security law for Hong Kong could be eased, and how to resolve the Brexit negotiations if no consensus has been reached for a long time, will be the main factors underlying the trend of GBP in the future.
Last week, the monthly figures of retail sales in Australia showed sales rose 2.4% in June, well below the 16.9% increase recorded in May. The establishment of a "hard boundary" around Melbourne, a six-week lockdown in the city, which was forced by a surge in new coronavirus infections and deaths, contributed to the sharp drop in retail sales figures.
Australia's budget deficit reached $86 billion last fiscal year and the number for this fiscal year will be $184 billion, the biggest hit to revenue since World War II, according to the Country's finance minister. The Reserve Bank of Australia (RBA) governor said Australia's economy has passed its low point but faces a "bumpy path ahead", especially with high unemployment adding to its uncertainty.
The Australian dollar surged to a one-year high of 0.71 on Tuesday on optimism about vaccine progress, the European recovery fund agreement and hawkish comments from the RBA governor of leaving interest rates unchanged, before falling back. It closed down at 0.7104, up 1.56% for the week.
As the Australian CPI, which directly shows the extent to which the economic lockdown in some parts of Australia has hit the economy, will be released this week, the AUD/USD may be affected.
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