Last data pieces before the election

29 October, 2020

The US is reporting its annualized GDP growth figure for the third quarter on Thursday at 12:45 GMT and the Fed’s favorite inflation measure, the core PCE inflation index, on Friday at 12:30 GMT. The data will be the last key releases before the presidential election next week, but its impact is expected to be muted and overshadowed by political news and Covid headlines despite encouraging forecasts. 

Q3 the fastest growing quarter ever, but keep your feets on the ground

The third quarter was a Covid-drama story in the US, but with the world’s largest economy moving out of the full lockdown misery, though with some restrictions remaining in place, it has likely been the fastest growing ever according to forecasts. Particularly, the annualized GDP measure is expected to have rapidly bounced up by 31% in the three months to September, almost cancelling out the chaotic -31.4% figure registered in Q2. If materialized, that would mark a form of a V-shaped recovery, and in other circumstances, it would cheer markets.

The reality, however, is ugly. The pandemic is far from over and unless an efficient vaccine is released soon, hospitals could quickly run out of beds during the flu season, bringing the scenario of a full lockdown back on the cards as is already happening in Europe. In fact, US infections seem to be going for a third wave as daily cases have topped a new record high recently. Hence, Friday’s GDP data could be simply ignored on Thursday in thoughts that the fourth quarter could become a total washout, especially if stimulus talks in Congress fail to find a breakthrough, leaving consumers and businesses financially vulnerable in the most difficult time of the year.

Stimulus could wait for now

On the monetary front, the Fed is not expected to act any time soon either. Although the “whatever it takes” phrase has been echoed in every single meeting since March, the truth is that the central bank has few weapons left in its arsenal. Interest rates have been squeezed to marginally above zero, while its balance sheet expanded from $4 trillion to $7tln during the March-June period before stabilizing as the central bank started a programme of unlimited asset purchases and established 11 lending facilities. And all this massive stimulus has only brought insufficient results so far given the slow response of the core PCE inflation index, which is expected to inch up by 0.1 percentage points to 1.7% y/y in September. Thus, under current conditions, a more generous policy could just make a hole in the water, unable to send inflation above 2.0%. Perhaps, this is the reason why the Fed chief is repeatedly calling for more fiscal contribution.

Dollar eyes election

Still, fiscal stimulus will have to wait after the election on November 3, if not longer, depending on the composition of the new Congress. If Biden wins and gets full control of the Senate, where Republicans are currently leading, the White House could deliver a more aggressive stimulus. But in this case, although markets are desperate for another financial boost, fears of a rising twin deficit may add pressure to the dollar. On the other hand, a Trump victory followed by a smaller stimulus package and improving data may benefit the greenback, while a Congress fully controlled by Republicans or Democrats could be a strong headwind to the currency.

In the meantime, the dollar may keep using its save haven protection, leaving risky currencies such as the euro exposed to infection increases and national lockdowns this week.

Looking at EUR/USD in the four-hour chart, the pair is trying to hold above a short-term ascending trendline after slightly falling below it. Technically, upside corrections towards the 1.785 resistance region are possible, especially if the 200-period simple moving average (SMA) is passed, as the RSI and Stochastics are flashing oversold conditions. Alternatively, if selling pressure resumes below the trendline, the door would open for the 1.1700 level and then for the 1.1665-1.1650 area.

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