The global economy has passed a volatile week, as concerns of COVIT- 19 have continued to grow with the economic and human impact. Some economic data out of China has started to signal a sizable economic slowdown. Outside of the Federal Reserve, both the Reserve Bank of Australia and the Bank of Canada cut their policy rates, by 25 and 50 bps, respectively. This week, ECB will publish its interest rate decision. However, likely, the ECB might not Join the Rate Cut Party. What other important events and releases will affect the market this week? Get more insights for the new trading week with AtoZ Markets ‘Forex Weekly Fundamental Forecast’.
9 March, 2020, | AtoZ Markets – Last week, central bankers and finance ministers from the G-7 group of nations met to discuss possible responses to disruptions that happened by the virus. Some analysts projected that the call would suggest a coordinated monetary and fiscal policy action.
Forex Weekly Fundamental Outlook: ECB Interest Rate Decision may Have a Rate Cut?
The RBA judged that the coronavirus outbreak as a “significant effect” on the Australian economy. Moreover, the BoC noted in the policy statement that the Canadian economy has been operating close to potential with the inflation targets. However, the COVID-19 virus has acted as a material negative shock to the Canadian outlooks. This week, the ECB will take interest rate decisions, and investors are keen to know whether the ECB will join the Rate cut party or not.
Unlike the Federal Reserve, no effective action has been taken from the European Central Bank (ECB) to combat a possible economic slowdown from the spread of COVID-19. The probable reason is that the ECB president doesn’t like to move the interest rate on negative territory. Moreover, as the central bank is purchasing sovereign bonds through a QE program, additional easing options are limited. Therefore, ECB could initiate the next round of targeted long-term refinancing operations (TLTROs). Overall, there is less possibility of an interest rate cut in the next monetary policy meeting this week.
On the other hand, FED made an inter-meeting rate cut to esteem the financial market volatility, as there were several COVID-19 cases in the USA. The ISM manufacturing PMI slightly remained in the expansion territory, despite some signs of virus-related supply disruptions. Moreover, Friday’s jobs report showed the health of the economy with employers adding 273K jobs. This week, the main focus of USD will be towards the CPI that may come at 0.0%.
Overall in EURUSD, some volatility is expected in this pair due to global economic uncertainty. However, last Friday, despite the 18% collapse in the yield of 10-year US bonds, EURUSD broke the peak of 1.1355. Therefore, the price may continue the momentum until the current sentiment ends.
Surprisingly, no matter what happens inside or outside of the UK, the GBPUSD pair returned to the iconic zone of 1.3000 for the fifth month in a row. Most of the analysts still believe that it has much room for further upside pressure. Besides manufacturing production and monthly GDP, the main focus for GBP will be the Annual budget release. However, the Bank of England (BoE) will hold its policy meeting on March 26, and policymakers may opt to cut rates 25 bps.
Manufacturing and service PMI is above the satisfactory 50 levels for the GBP. Therefore, a better than expected manufacturing result may increase bullish sentiment in the GBPUSD price.
AUDUSD opened the last week at 11 years low and closed at 0.6525. The surprised Federal Reserve 0.5% rate cut on Tuesday has boosted the AUDUSD to reach 0.6598. Moreover, the Reserve Bank of Australia cut its rate by 0.25%, earlier in the day. The RBA rate cut expected, but the emergency Federal rate cut makes the AUDUSD volatile.
The Australian dollar has struggled for more than two years during the US-China trade war and currently the Coronavirus around China. We know that China is the largest consumer of Australia’s raw materials exports. Therefore, the adverse effect is average.
The three months rise of AUDUSD from 0.6700 to over 0.7000 from October to January was due to the trade optimism. Later on, the price stabilized when The US and China signed the deal in Washington D.C. on January 15th. Therefore, AUDUSD price has a higher potentiality to move higher based on any good news regarding the effect of coronavirus.
The Gold closed the week with substantial gains and may remain a better bid this week if the virus fears continue to dominate the market sentiment. The yellow metal has got over a 5.4% gain last week, which is the biggest weekly gain since February 2016. The Federal Reserve’s emergency rate cut and the resulting slide in the US yields and the Dollar Index also boosted the Gold to move higher.
The fear of coronavirus would push the US economy into recession. Therefore, the Fed moved out of its regular scheduled announcements for the first time since 2008 and cut the rate by 50 50 basis points. On the other hand, the US 10-year yield fell by over 20 basis points and hit a record low earlier Friday.
This week has several impactful economic indicators but likely still long on concerns about the ongoing escalation in the new coronavirus. The Coronavirus outbreak is showing no signs of slowing down. Therefore, there is a strong case to believe that the gold will move higher as a safe haven.
The risk aversion sentiment may worsen if China’s trade data prints well below estimates, fearing a deeper economic slowdown in the global economy. The US CPI for February scheduled this week. Therefore, investors may ignore the inflation figure if the coronavirus continues to spread at a faster rate around the world.
For gold, only a breakthrough in coronavirus research could bring a positive shift in the broader market sentiment. Therefore, it will weaken the demand for safe havens.
The number of new coronavirus cases in Germany and France is increasing to start disrupting working life and close schools. The European Commission has started teleconferencing instead of meeting after the first cases of the virus in Brussels. For the oil markets, the decrease in transport demand and to a lesser extent industrial demand will indicate how badly the virus spreads for the week.
The coronavirus has spread over 80 countries, putting travelers off both business and leisure travel. The bigger problem for the airlines industry is the European regulation that requires airlines to continue flying on routes to Europe. This means airlines are now flying to Europe with mostly empty planes. Therefore, the less demand for Crude oil may hamper the oil price more.
OPEC+ tried to convince Russia to take part in the production cut from OPEC+ countries in mid-February. However, OPEC+ failed to reach an agreement on output cuts last week. Russia played a round of poker the previous week. It knows that Saudi Arabia and OPEC will go ahead and reduce output by around 1m bbl to mitigate the loss in the Oil price. Moreover, Russia speculated that it could outlast US producers in surviving by a decline in oil prices.
According to the Dallas Federal Reserve, the breakeven prices for shale oil production in the US are between $48 and $54 a barrel. The current price for WTI is close to $40, and it can move more down with the negative news of coronavirus.
Overall, the effect of coronavirus around the globe is currently behind most of the move in the financial market. Following the FED, RBA, BOC, and ECB may not join the rate cut party this week.