The dollar is reacting nervously this week to the start of discussions on a new stimulus package, but the pressure remains behind the scenes. 1 trillion is quite a bit considering the scale of injections in March-April, but it concerns the most important factor shaping consumer demand - unemployment benefits.
Currently, one of the main elements of support for workers is a temporary increase in unemployment benefits by $500 per week above normal benefits, and in May, benefits reached 6.4% of total income. The growth of this revenue component is very strong, and payments will be completed at the end of July.
It was assumed that the US labor market would recover from the fall last February-April in 3 months, but the reality turned out to be much worse. The abolition of benefits will not lead to a decline in unemployment, and only for this parameter, a decline in GDP by 3.3% is possible, while all other things being equal.
As a result, negotiations on a new stimulus package are gaining special importance; without their successful completion, we cannot rely on maintaining consumer demand at the current level. As of July 23, the chances of completing negotiations by August 1 are small, which means that the level of consumer confidence will collapse and inflation expectations will decline. The indicated factor is the main one that pushes the dollar down.
Another two factors that put pressure on the dollar are the confrontation with China and the growth of coronavirus cases. The US has given China three days to close the Consulate in Houston, and this move is regarded as extremely unfriendly. The US has consulates in Shenyang, Shanghai, Chengdu, Guangzhou and Wuhan, and China will no doubt find a symmetrical response.
Gold, on the other hand, continues its victorious march towards a 9-year high, and there is still no reason to stop.
EUR/USD
After heated discussions, EU leaders agreed to create a single recovery fund of 750 billion euros. The EU will issue a joint debt for the first time in history.
Despite the fact that the initially announced volume of the fund of 750 billion has not changed, the amount of grants in it has declined under pressure from the "modest four" (Denmark, Sweden, Austria, the Netherlands) and will amount to 390 billion against the proposed 500 billion. Repayment of the attracted capital is expected already in 2058.
The agreements reduce the risks in the euro area, however, the ECB has not yet commented, but it is assumed that they will follow today and will be positive.
The EUR/USD pair has broken through the resistance at 1.1494 and is targeting 1.18, however, additional positive signals are needed to continue the growth. Today, the European Commission will publish the consumer confidence index for July, while tomorrow, Markit will provide the PMI for July. The forecasts are positive and together with the expected comments of the ECB, they are able to support the growth of the euro. A wide support zone is located at 1.1390/1430, but a correction is still unlikely at the moment.
GBP/USD
The pound lags behind the dynamics of most G10 currencies, as it is experiencing a negative impact of two factors. First, there is an increase in tension between the US and China, and second, the main scenario for negotiations on a trade deal with the EU is a no-deal scenario. Another round of negotiations is due to end today, and no breakthrough is expected. Since there are no other meetings planned in the future for several weeks, there is no place to look for positivity.
Macroeconomic data released last week did not impress investors, and the creation of the EU recovery fund makes the pound an outsider in the pair against the euro.
The support zone is 1.2640/60. In case of a decline, buy with the target of 1.2800, since even a weak pound can benefit from strong pressure on the dollar. After breaking through the level of 1.2806, the next target will be 1.2920/30.
