Markets were mixed yesterday over consequential statements from the United States. In particular, Powell's speech that refutes the rumors of prematurely curtailing the bond purchase program has pacified investors, but Joe Biden's announcement regarding a new $ 1.9 trillion-worth of economic stimulus has pulled demand for the dollar down.
At the same time, things are not very good in the EU. Germany, because of the persistent rise of COVID-19 cases in the country, has decided to tighten its quarantine measures.
Yesterday, Jerome Powell nipped talks of prematurely curtailing the Fed's massive bond buying program. He said that "now is not the time" for such speculation, and that they "need to be very careful when discussing the asset purchase program." Powell added that cutting off stimulus programs too early would deliver more negative impact for the economy than a later decision.
These statements were a response to the call of some Fed officials over curtailing stimulus programs that were introduced in 2013. According to them, a strong economic recovery after the pandemic could lead to a reduction in bond purchases at the end of this year. And in addition, there is an upcoming stimulus package proposed by the Democrats, which will slightly relieve the burden on the Federal Reserve.
But during his speech, Powell firmly said that the economy was still far from its goals. He also mentioned what happened seven years ago, when the markets were shaken by the Fed's decision and the yield on Treasury bonds soared. According to him, such rash decisions will certainly not be used in the future. Powell also added that as the economy recovers, Fed officials need to be more careful in their words.
In any case, following its meeting last month, the Fed decided to continue keeping the monthly volume of bond purchases at $ 120 billion.
Now, for the new stimulus plan from President-elect Joe Biden, the government will prepare an amount of $ 1.9 trillion, and it will go to the fight against the coronavirus pandemic, as well as to support the US economy.
The plan includes a wave of new spending, that is, a $ 2,000 increase in direct payments to households, an increase in unemployment benefits and an increase in financial support for state and local governments. A significant chunk of money will also go towards expanding vaccination and coronavirus testing programs, and there is also a proposal to raise the minimum wage.
Many became ecstatic on this news, as they believe that it is simply necessary amid the COVID-19 pandemic. However, there are also those who see that it will only deliver negative impact on the US dollar, as such massive injection of money may cause the economy to undergo a crisis the same as that of 2008-2009. In any case, the latest data on the US labor suggests that more decisive action is needed.
The latest report from the US Department of Labor said initial jobless claims have jumped by 181,000, thereby reaching a total of 965,000. This growth was the fastest observed since the end of March 2020, when the number of jobless claims jumped by 3.56 million at once. The Economists expected the figure to rise by only 8,000 and total by 795,000.
Meanwhile, today, data on US retail sales will be published. It is expected to show a slight contraction for the data for December, as the surge in coronavirus last month has brought new restrictions and reduced economic activity. Economists forecast that the report will point to a slight decline in retail sales compared to November, despite the fact that e-commerce, at that time, was booming. But for the subsequent reports, the figures are expected to improve gradually, mainly due to the start of mass vaccinations.
The situation is also quite bad in the EU. Yesterday, because of the persistent rise of COVID-19 infections in the country, German Chancellor Angela Merkel has decided to tighten quarantine restrictions. To add to that, the new strain of coronavirus has started to spread in the EU, so as a result, Merkel has scheduled a meeting with regional leaders to discuss additional restrictions.
The new restrictions could include a curfew, complete closures of all schools and the cancellation of public transportation. This issue will be discussed at the meeting on January 20. Until that moment, the European currency will clearly remain under pressure against the US dollar.
But at the moment, the technical picture of EUR/USD has not changed much. Trading continues in a sideways channel, and the attempts of euro bears on bringing the quote below monthly lows was unsuccessful. Now, they have to push the euro below 1.2140 in order to see a sharp drop towards 1.2110, 1.2080 and 1.2040. But if the bulls manage to raise the quote to 1.2180, EUR/USD could climb towards 1.2220 and 1.2280.