Daily Market Pulse

Powell interview moves USD and DOW higher


The USD and US equity markets are higher this morning buoyed by comments made by Fed Chairman Jerome Powell yesterday. Speaking on the CBS program “60 Minutes”, Powell detailed the impact of the Covid-19 virus on the US economy and discussed how it needs to proceed back toward growth. While his tone was highly confident that the economy would make its way back, he warned that the economy may not fully recover until a vaccine is found for the virus. He also said that he does not believe the current downtrend will resemble the Great Depression, but that there is a possibility U.S. unemployment could reach 25%. He also reiterated that the Fed is not considering negative interest rates, saying that “I continue to think, and my colleagues on the Federal Open Market Committee continue to think, that negative interest rates is probably not an appropriate or useful policy for us here in the United States.” He also reiterated earlier comments that negative interest rates “do not support economic activity and introduce distortions into the financial system”. The USD is higher this morning against the EUR, GBP, and JPY and trading steady against the CAD. DOW Futures are higher after the Powell remarks, as they indicate an opening of more than 270 points later this morning. US Treasury yields are higher this morning reacting to the Powell comments, with the 10-year note trading at 0.6452% and the 30-year bond at 1.3509%.


EUR/USD had a quiet trading range and is near the lower end as we begin the North American trading day. The single currency is trading in a range of lower highs and lower lows, with technical momentum still pointing to the downside as the EUR trades below the 50, 100, and 200 moving averages. Keeping pressure on the EUR is the continuing US-China trade tensions. Virus statistics continue to fall in Europe as Spain and Italy have reported fewer cases and Europe’s larger economies gradually begin to open. Concern over the ability of the ECB to continue to help based on the German constitutional court ruling, that part of the bond-buying mechanism is illegal could limit further central bank action. Overall, the downside for the EUR seems more likely than the upside.


GBP/USD moved lower overnight as traders weighed, virus problems, Brexit news and now comments from the Chief Economist of the Bank of England, Andy Haldane, that negative interest rates are a possibility for the U.K. Before that move occurs, the BOE may look to expand their Quantitative Easing program and buy an additional GBP100 billion worth of bonds. But, just the comment of a possibility sent the pound lower. Strong support levels were tested overnight and the currency did rebound in early European trade but the downward bias remains. As for Brexit, EU negotiator Michel Barnier and UK negotiator David Frost admit to difficulties in the talks. Brussels wants the UK to agree to accept the EU rules in return for easy access to the EU market, and London has continued to reject that idea. The deadline for both sides to request an extension to the transition period is June 2nd. PM Johnson has repeatedly rejected prolonging the period, and without favorable terms, the UK would default to World Trade Organization rules. These two events, while independent, will weigh down the pound together. 


USD/JPY is trading near overnight highs as Japan has officially entered a recession with the drop of the first-quarter GDP of an annualized 3.4%, while higher than expected, the second consecutive quarterly drop of GDP after the fourth quarter of 2019 had contracted 7.3%. On a quarter to quarter basis the GDP shrank 0.9% in the first quarter compared to the forecasted 1.2% decline. This marked the first recession since the second half of 2015. According to Economic Minister Nishimura, the slump in external and domestic demand will keep the Japanese economy is a severe state. He also said it was hard to say when Japan’s economy will return to pre-coronavirus levels. Businesses need to re-open gradually, in several steps or the spread of the virus could return. 


USD/CAD is trading towards the lower end of its overnight range as oil prices moved higher overnight. Brent crude was up $1.19 at $33.69 a barrel, its highest level since April 13th and U.S. West Texas Intermediate crude was up $1.26 at $30.69 a barrel, the highest level seen since March 16. Output cuts and gradual recovery in fuel demand as more countries ease lockdowns have aided oil prices. The Canadian government will extend emergency wage subsidies for another three months until the end of August accord to Prime Minister Trudeau. Canada will spend C$450 million to help researchers and research institutions as well. Trudeau also was quoted as saying the world will have to adjust to a new normal, even after the pandemic ends and a vaccine is created. As oil goes, so goes the loonie at the moment, so expect the Canadian Dollar to stay better bid today. 


China’s economic data releases for April have shown an uneven recovery, as Industrial Production showed its first expansion since the start of the year, coming in above expectations at 3.9%, led by the manufacturing of specially-used equipment and telecommunication equipment. Retail sales were sluggish and remained in contraction for April, and real estate investment has fallen as well. The tension between the US and China has seen gold trade at its highest levels since late 2012, rising to around $1,760.


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