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Fed won't keep the dollar in check while the virus rages

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The fundamental picture of the US economy is appalling. The data are not just a streak of negativity. There have never been such records in US history. Retail sales fell by 8.7%, which was the strongest decline in the history of these data. The NY Empire State Manufacturing Survey also reached an unprecedented drop to -78.2. The industry collapsed by 5.4%, and the number of new buildings fell by 22.3%. Indicators are worse than forecast estimates.

It's all about the quarantine measures taken to combat the spread of the coronavirus. It is worth noting that they were introduced in mid-March. So these catastrophic indicators are not a complete monthly picture that allows us to understand the scale of damage from the quarantine.

The Beige Book reflected pessimistic moods. Thus, economic activity has sharply declined in recent weeks. Federal Reserve officials are sounding the alarm about a sharp drop in employment in all regions. Highly uncertain forecasts among the representatives of business circles. This is mainly about the deterioration of conditions in the next few months.

A new batch of weekly data on the labor market was released today. Despite the fact that the growth in the number of new applications for unemployment benefits has slowed, the indicator remains alarming. More than 5.2 million American citizens are considered unemployed. Since the beginning of April, 20 million people have applied for benefits in the US.

Nevertheless, the dollar does not get tired of conquering peaks, despite the fact that the Fed floods the markets with liquidity. The only explanation is a general flight to protective assets. Scared investors go into quality, which includes actively buying the US dollar.

The dollar index again broke through the 100-point mark during the US session, which means that the greenback received a new boost to growth.

USDX

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The market's attention shifted to Trump's guide to reviving the economy. It is unlikely to be related to reality; rather, it looks like an attempt to calm the markets that might not be as successful. Two days ago, US chief epidemiologist Anthony Fauci said that weakening the quarantine in early May is an overly optimistic scenario.

A visual analysis of the incidence rate in the United States and Germany suggests that Trump is really in a hurry: Germany not only passed the plateau, but also, it seems, waited for a steady decline in the number of new cases before talking about quarantine removal. The United States seems to have just reached a plateau.

At this stage, the words or wishes of the US President may not coincide with the specific measures being taken.

The US currency shows a strong positive correlation with risk aversion. "Bouts" of decline in the dollar happened, but their duration is usually short. The greenback will be able to resist until the curve of new cases begins to steadily go down.

The fundamental factor that is currently exerting pressure on the dollar is the country's ultra-soft credit policy. In this regard, the series of strengthening the US currency can be considered as a good opportunity to get into the medium-term short for the dollar.

The material has been provided by InstaForex Company - www.instaforex.com