Stimulus Hopes Weighed on the Dollar

  • 21
    October, 2020

    Stimulus Hopes Weighed on the Dollar

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    The dollar hit a one-month low on Wednesday as investors who are optimistic about a pre-election U.S. stimulus package sought out riskier currencies, while the strong recovery in China’s economy helped drive the yuan to a two-year high.

    President Donald Trump has raised hopes for a stimulus breakthrough, saying he was willing to accept a large aid bill, despite opposition from his own Republican Party.

    That sent U.S. 10-year Treasury yields (US10YT=RR) to a four-month high, in anticipation of more government borrowing, and pressed the dollar index (=USD) to its lowest level since September by boosting investors’ mood.

    Doubts that any package can actually pass the Senate are keeping the dollar from breaching last month’s two-year lows.

    The dollar index was last down about 0.1% in Asia.

    “U.S. stimulus faith remains in play,” said Sook Mei Leong, ASEAN head of global markets research at MUFG in Singapore.

    “This is notwithstanding that euro/dollar remains vulnerable to the stream of … increases in COVID-19 cases and crimped economic activities from the re-introduction of lockdowns.”

    Such worries and the drawn-out and oscillating fortunes of the U.S. stimulus bill have held the dollar in its range this month and will determine its next moves.

    The Japanese yen has likewise been held in stasis as the brightening mood weakens the greenback, but the simultaneous rise in U.S. yields attracts investment flows from Japan out of yen and in to dollars. The yen edged up 0.1% on Wednesday.

    “All eyes are on whether a U.S. stimulus bill is agreed upon,” Kim Mundy, currency analyst at the Commonwealth Bank of Australia (OTC:CMWAY) in Sydney, said in a note.

    “Without a more aggressive U.S. fiscal thrust, the U.S. economic recovery is at risk and the dollar is vulnerable to a renewed bout of strength in the short-term.”

    TECHNICAL OUTLOOK

    In the daily charts of GBP/USD, the sterling gained against the dollar early Wednesday morning in Sydney all the way through Tokyo session.

    The stimulus talks of Nancy Pelosi weighed the dollar against other major currencies. The uncertainty in the dollar also increases as the U.S. Presidential Election in November comes near.

    Although the sterling’s outlook may also be negative due to the resurgence of COVID-19, lockdown measures and the Brexit deadlock, the pound profited yet from the ongoing woes in the U.S. economy.

    We can see that the pair is still bouncing inside the area of support and resistance. Any breakouts from these levels may not be seen anytime in the week or the following months. Although, short-term traders are able to take advantage of this volatility, it is still best to proceed with pre-cautions.

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