EURO and USD – Watch for losses this week

This is a big week for the US dollar and euro. There are monetary policy meetings by Federal Reserve and the European Central Bank along with first quarter GDP numbers scheduled for release.  The first look at Q1 GDP is always more market moving than later reports and may even have a more significant impact on currencies than the rate decisions. We know that the US and Eurozone economy contracted in the first 3 months of the year but the question is by how much. Major countries in Europe went into lockdown mode approximately 3 weeks before major US states so we can expect Eurozone GDP growth to be weaker than the US. Yet the Federal Reserve is keener to increase stimulus than the European Central Bank but in reality, neither central bank is expected to ease. Their guidance will be the central focus. 

The question of whether euro or the US dollar will be hit harder this week will depend on whether these central banks will take more action, what those steps could be and how deep of a contraction is expected for Q2, H2 or 2020 growth. ECB President Lagarde recently said the Eurozone economy could contract as much as -15% but Powell has been tight lipped about their forecasts. Earlier this month, Powell tried to sound optimistic, saying that the recovery post COVID-19 should be robust but it may be difficult to adhere to that outlook with social distancing rules likely to remain in place for the rest of the summer. Increased bond purchases is an option for both central banks but having eased aggressively between meetings, they may not be eager to up stimulus for a few more weeks. With that said, we are bearish euros and the US dollar which means that the greatest risk is EURJPY weakness ahead of these major events.

The Bank of Japan pledged unlimited bond purchases last night, doubled their corporate bonds and commercial paper purchases, cut their GDP forecast and projected inflation to remain below 2% for another 3 years last night but there was very little impact on the Japanese Yen. The central bank now expects the economy to contract by 5% this fiscal year which is slightly more optimistic than the IMF’s outlook. All of these announcements should have been negative for the Yen but investors are skeptical about how much lower these efforts will drive interest rates. 

For the most part, currencies and equities traded higher on Monday on the promise that lockdown measures will be relaxed in the coming weeks, even in hot zones like New York but with such major event risks on the calendar, the euro and dollar remain at risk. The next 24 hours is the only opportunity left for proactive trades because the event risk on Wednesday and Thursday are so significant that new trades should only be taken after the central bank meetings and GDP reports. US consumer confidence numbers are scheduled for release and sentiment is expected to deteriorate further. Earnings are also in focus with many big names like Apple, Amazon, Google, Facebook, Microsoft, Exxon, Shell, Pepsi, Starbucks, General Electric and 3M scheduled to release their results and guidance.

Taking a look at the week ahead, we expect the euro and US dollar to underperform and the Australian dollar and New Zealand dollars to outperform. Australia and New Zealand have begun to ease lockdown measures and will be among the first to re-open their economies. The Canadian dollar is also attractive with little data on the calendar but oil prices resumed their slide, putting downward pressure on the loonie.