USD traded lower against most of the major currencies on Monday on the new stimulus deadline. Over the weekend House Speaker Nancy Pelosi gave the White House a 48 hour deadline. She said if they want to get something done before the election, it needs to happen by Tuesday. President Trump is pushing for a deal and the White House is cautiously optimistic but the sell-off in stocks is a sign that investors don’t believe there’s enough political support in Congress for the new package.
The only alternative for Trump is a quick win with a smaller stimulus package but that’s also unlikely to receive Democratic support. There will be a standalone vote on more Paycheck Protection funds on Tuesday followed by a vote on a skinny US$500 billion stimulus bill on Wednesday. If nothing happens by end of day Tuesday, stocks could fall sharply, leading to broad based risk aversion in the forex market. For now, the possibility of stimulus is the only thing keeping the equity markets supported.
Several Federal Reserve officials are scheduled to speak this week but there’s very little market moving data till on Friday. Currently only 2 US states show a downward trend in new COVID-19 cases. The impact of rising coronavirus cases in October will be an important question as Japan, UK, the Eurozone and US are scheduled to make important announcements.
Euro was one of the strongest currencies on Monday but the move was driven almost entirely by short-covering. There’s been very little good news out of the Eurozone.
ECB member Holzmann said despite the virus outbreak, there’s no need yet for more easing but comments from other policy makers suggests otherwise. ECB President Lagarde said they haven’t run out of tools and ECB de Guidos confirmed that recent data shows the recovery losing momentum.
Sterling also avoided collapse after the EU said they are ready to intensify talks but we’re not optimistic that an agreement can be reached. The UK continues to remain resistant with UK’s Brexit minister Gove saying talks would be meaningless if the EU did not change its stance. Between coronavirus cases in excess of 16,000 a day, new restrictions and Brexit uncertainty, like euro, sterling should be trading much lower.