GDP Sees Rceord Fall in Q2

The US Q2 GDP reading, released yesterday, confirmed the worst period of economic activity since the second world war with the economy contracting by 32.9% from April to June. To put the contraction in perspective, the US economy shrank by just 8.4% during the height of the last recession in 2008, while in 1958, the growth declined by 10%.

The driver behind the record fall in economic activity was the huge disruption caused by the COVID-19 outbreak and the nationwide lockdowns imposed as means of controlling the virus. With domestic flights shut down and large swathes of the economy closed, US economic activity was decimated for a great deal of Q2. The reopening that has occurred across some states in the US has also been complicated by a resurgent outbreak of the virus. More than ten states in the US have now reversed reopening measures to reimpose local lockdowns with other states postponing scheduled re-openings.

The ongoing issues around attempting to re-open the economy have been reflected in the week unemployment claims which have remained at elevated level. The latest weekly unemployment figure came in at 1.434 million, marking an increase from the prior week’s 1. 422 million.

Congress Negotiating New Aid Package

Congress is currently deep in negotiations aimed at agreeing a further round of support for the economy which is expected to include a second direct payment to individuals as well as another round of small business loans. Initially, the government agreed to pay those laid off as a result of the virus $600 per week in benefits. However, those benefits are due to expire today, and a replacement plan has not yet been agreed. Around 20 million people are currently registered for financial support as a result of the COVID-19 outbreak and the expiry of benefits this week is creates a very concerning situation for those affected.

The Fed announced this week that it will extend the duration of a number of its lending operations which were due to expire in September, through until the end of the year. While no further easing was announced at the July FOMC this week, the Fed reassured markets that it will act further if necessary. The market will now be focusing on next week’s NFP release. The last two releases have seen record job growth in the US, fuelling optimism that the recovery is occurring a strong pace. However, in light of the renewed lockdown measures seen over the last month there is a risk now that this momentum will have weakened and should next week’s release undershoot expectations, the downward movement in USD is likely to gather pace.

Technical Views

DXY (Bearish below 93.81)

From a technical viewpoint. The Dollar index is now sitting on a major, long term support level. Having broken through the long-term rising trend line, price has since crashed through several key support levels and is now testing the 92.63 level. The outlook remains firmly bearish here with a downward break of the level expected in the near term, targeting the next support at 90.72.

US GDP Falls Most Since WW2 Over Q2

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Share this post: