Pressure Mounts on the Dollar due to Stimulus Prospects

Even though the US election is now closer and uncertainty is expected to rise near the event, the currency market had been mainly driven by US stimulus talks. Faced with a new package worth between $1.6 – $2.2 trillion, the US dollar had been under pressure, as the new funds will further support the economy while keeping the dollar subdued.

dollar and stimulus negotiations
Source: https://www.channel3000.com/stimulus-negotiations-trump-signs-off-on-a-1-8-trillion-counter-offer-to-pelosi/

The negotiations saga continues

After abruptly ending the negotiations, President Trump made a U-turn and it is now supporting a bill worth $1,8 trillion. Whether or not that would be enough it’s still up to debate, considering the democrats had already passed a bill in the House, worth $2.2 trillion. Based on the latest headlines, not only the size of the package is the main problem, but how the money will be spent.

The democratic side would like to spend more on countering the pandemic and also, would not like the President to have discretionary authority, especially now that the election is close. On the other side, the Republican side is still divided, as some conservative members want a small bill, given the budget deficit already ballooned to record levels.

Euro and Pound rise

Two of the main risk currencies, the Euro and the Pound, had risen during the past week, as FX market participants cheered the idea of new US stimulus. The EURUSD continued to recover from the September selloff and managed to rise above 1.18 for the first time since September 21st. GBPUSD, on the other hand, broke above 1.30, which was a critical resistance level, even though uncertainty around Brexit had not yet vanished.

Should we expect market volatility in the weeks ahead?

Although the market is very confident a US stimulus bill will be passed before the election, this isn’t a done deal, yet. Republicans face a backlash of confidence due to poor pandemic management and aware of the advantage, democrats would try to kick the can down the road until after the election.

With no new support from the government, many industries will face increased pressure and the US dollar could start to gain strength, but for now, the order flow is pointing towards an imminent deal, even though the news is suggesting something else. If the negotiations will slow momentum again, then the dollar and the Japanese Yen would very like be favored, as the deflationary risk will start to be repriced. What do you think about the prospects for new stimulus in the US? Will it occur before November 3rd?

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