Lack of clear funding arrangements for eurozone economy pressures on EUR / USD
Fear has big eyes. Many banks and investment companies present the long-term prospects for the US dollar bleak for two reasons. First, a tremendous fiscal stimulus will lead to an increase in the budget deficit and public debt, which will worsen the financial condition and increase the risks of a new crisis. Secondly, huge monetary expansion will contribute to the inflation of the Fed, and an excessive supply of money, as you know, leads to a decrease in their value. In fact, reality has repeatedly proved the fallacy of various theories. Will the same thing happen this time?
Yes, the Responsible Federal Budget Committee expects the budget deficit this year to be $ 3.8 trillion, or 18.6% of GDP, and government debt to grow to 107% of GDP in 2023 (according to the previous forecast, 86%), but estimates for debt service costs have not changed. This is a figure of 2% of GDP, which is associated with a fall in rates on US Treasury bonds. In essence, this means that debt does not do much harm. Together with the high demand of non-residents for treasuries, this enables the States to have more debts.
Decisions in America are made quickly, unlike Europe, which seems to have agreed to create a € 1 trillion bailout fund, but investors have no idea what resources it will finance. The growth of the 3-month LIBOR rate, according to which the Old World banks are oriented to lend to each other, and its differential with swaps on overnight indices that track the ECB rates to a 4-year maximum, indicates an increase in the risks of fragmentation of the eurozone. The countries included in its structure bear different costs in the fight against coronavirus, and if there is no clear agreement on how to pay the bills, the chances of the collapse of the currency block will increase.
The costs of the eurozone countries in the fight against coronavirus
Let's not forget that the current recession promises to be deeper in Europe than in America, as evidenced by the fall in business activity indices to record lows. The Composite Purchasing Managers Index in the United States fell to 27.4, which is the lowest since October 2009. Its Eurozone counterpart has crashed to 13.5, the lowest since accounting began in 1998.
Dynamics of business activity
Source: Wall Street Journal.
As for the balance of the Fed, everyone already knows about its growth, but the ECB may surprise the markets with the expansion of the European QE by at least € 500 billion at the end of April. This opinion is inclined by 27% of Bloomberg experts. Most believe in an increase in monetary stimulus in September. Moreover, before March 2021, the emergency asset purchase program is most likely not to end.
The dynamics of European QE
Who is right will judge time. Both the "bears" and the "bulls" on EUR / USD have their own arguments, and changing conditions can make adjustments to their position. In the meantime, the euro, due to disagreements of European officials, continues to be under pressure, and if it can not return above $ 1.08-1.081 in the next few days, it risks heading to $ 1.065.
LiteForex Analyst Source