FX Week Ahead 18.05.20

By Giles Coghlan, Chief Currency Analyst at HYCM

Federal Reserve’s Chair, Jerome Powell, delivered a sober verdict on Wednesday that the US economy faces an extended period of ‘weak growth’ and ‘stagnant in-come’. Jerome Powell, however, played down the prospect of negative interest rates for the US and this resulted in USD strength midweek. In contrast, the Reserve Bank of New Zealand expressed a willingness to use negative interest rates in the future and this resulted in investors selling the NZD. In other news concerns over a second outbreak of COVID19 also weighed on stocks as many nations begin to come out of their lock downs.

Key events from the past week

- USD: Fed Powell’s Speech, Weds, May 13. Fed’s Chair Powell delivered a gloomy message that the US could expect ‘weak growth’ and ‘stagnant income’ for some time to come. He also downplayed the idea of the Fed using negative inter-est rates, which caused the Dollar Index to rally above 100 on Wednesday.
- NZD: RBNZ Interest Rate Decision, Weds, May 13. The deputy Governor Geoff Bascand clarified that the RBNZ would like to be ‘ready for negative rates’ by the end of the year. It was this willingness for the RBNZ to allow negative interest rates that weakened the NZD midweek.
- Coronavirus: Second wave fears weigh on stocks. With many countries now re-emerging from lockdown measures fears are growing around a second wave of COVID19 cases. Wuhan in China are now testing all 11 million residents in a bid to ensure that a second COVID19 outbreak does not return there.

Key events for the coming week

- EUR: German Manufacturing PMI, Friday, May 22. Germany is the largest member and contributor to the eurozone, so domestic data heavily influences the euro. Any further surprise manufacturing weakness from Germany will likely weigh on EURUSD next week.
- XAU/USD: Demand for gold grows. The World Gold Council reported gold Ex-change Traded Funds (ETF’s) saw large inflows of gold purchases from North America ($7.8bn) in April. XAU/USD was supported above $1700 this week, will gold buyers reach $1800 next week as fundamentals for gold improves further?
- Coronavirus: Watch out for the latest virus news. The world has renewed fears about a second ‘wave’ of infections. Historically pandemics do return in ‘waves’, so this fear will remain until there is an effective treating or vaccine for COVID19.

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