USD risk event as Congress debates fiscal package
Congress returned this week from a two-week summer recess to a fast-approaching deadline. Boosted unemployment benefits and rental eviction moratoriums are due to expire at the of July. US lawmakers need to come to an agreement fast or risk plunging millions of American households into hardship.
Little progress has been made yet, with lawmakers at odds over what the package should include and how much it should cost. House democrats have made clear what they want: already passing a $3tn stimulus measure, including $1tn alone in aid to state and local governments. Republicans though, with concerns of further blowing out the deficit, are reluctant to spend more than $1tn in total. Meanwhile President Trump has been pushing for a payroll tax cut, something congressional republicans have previously rejected.
Senate majority leader Mitch McConnell will soon reveal the republican proposal, which is expected to include another round of direct payments. But with current benefits due to expire so soon, lawmakers will likely be forced to some form of agreement. McConnell has acknowledged his package will need democrat support to pass through the senate.
The question is whether this becomes a volatility event for the US dollar. Of course, a big delay or no agreement at all would be terrible news, with the risk of throwing millions of people into economic hardship, and likely exacerbate the USD’s downtrend. But could a quick, strong relief package result in some USD short-covering?
See the US dollar index (USDX) daily chart above. The USD has been drifting lower for some time now, but traders offered it sharply lower yesterday. I like to think that a body in motion stays in motion, but good news on this next relief package could well encourage some temporary short-covering. I would be surprised to see the USDX surpass the 96 handle again, but perhaps a snap-back to the higher end of 95 is possible, where EURUSD would be back towards 1.1440.
And as American voters drift increasingly towards Joe Biden and the democrats, the more the US dollar is expected to drift lower. Markets will perceive a Biden administration as less business friendly, and worry it could hurt the USA’s competitive advantage. This will further encourage a capital outflow into rest of world currencies and assets, and could see the USD and US stocks begin to underperform.
With four million Americans diagnosed with the coronavirus, more than 140k deaths, and drastic changes to everyday life, the pandemic is affecting every American life, household, and job in one way or another. More than 23 million people have expressed little confidence in their ability to meet their next rental payment. Further, recent data shows two thirds of Americans disapprove of their government’s pandemic handling so far. Congress has an opportunity to deliver something rewarding here, especially if republicans are hoping to reverse their poor poll showings.
The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our clients. Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. It does not take into account readers’ financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.