A temporary whim on the stock market or a change in sentiment?

Last week was very intensive in terms of capital migration on the stock market. The mood was mixed from the beginning and it was only during the last sessions that cash clearly escaped from the market. Fears about a pandemic are growing. Also in Poland, messages began to be issued reminding about wearing masks even in large-format stores. Therefore, it is natural that the dollar has again attracted investors. Are we dealing with a change in sentiment? Is it only a temporary, market whim?

Texas introduces restrictions

The biggest problem with the epidemic in the US now concerns Texas. Not so long ago, the daily increase in incidence in this condition increased by virtually 10% on a daily scale. The eyes of the American authorities turned especially at that time, due to the fact that Texas is the industrial center of the United States. The restrictions introduced mainly apply to restaurants and bars. This move of the governor is therefore the first signal confirming the supposition of the further development of the epidemic.

The US economy strongly felt the effects of the restrictions for several weeks. It is possible that further restrictions, which mainly affected large workplaces (which are located in Texas), naturally raise concerns about further GDP growth. What's more, sentiment clearly deteriorated exactly on the day when it was announced that in the United States, 40 new people with COVID-19 had been reported in one day. Investors' eyes will be on Texas, which has become a "barometer" for determining the likelihood of a second wave of the epidemic.

Chart EUR / USD, H1 interval. Source: xNUMX XTB xStation

The chart clearly shows how the last session affected the EUR / USD valuation. The dollar has actually returned to favor, although strong gold may still bother him a little. For now, we are not focused on thinking about bad moods and the total reverse of sentiment. The correction that we marked with the blue box that formed between support and resistance (dashed red lines) will be a key moment when we want to make a buy or sell position. Great caution will be useful in the coming days. We are counting on higher volatility, which will be related to key US data in the context of further restrictions. If these reports are confirmed, there is a high probability of impulsive, downward moves.

Will the Fed manage to outshine market fear?

It is already quite a tradition that activity Federal Reserve Of the United States, appears at times when market uncertainties need to be masked. Due to concerns about the further development of the epidemic, the FED came to the aid of the bulls. The institution's activities did not rest only on words. Relaxation of the regulation of the Volcer Rule was also announced, which had a lot to do with commenting on the reserve. It was announced that commercial banks have a very healthy financial structure and are therefore very well prepared for a possible crisis. What, however, is associated with the above-mentioned relaxation of regulation? It concerns the reduction of restrictions related to market risk taken by commercial banks (including also regarding investing in derivatives). Undoubtedly, for many investors such a decision was not a small surprise. Nevertheless, she successfully diverted her attention from the pressing problem that coronavirus has become. On the other hand, when it comes to loosening the restrictions of the Volcer Rule, it is important that they were introduced in 2010 to prevent a repeat of Lehman Brothers. Meanwhile, the FED even encouraged more activity in derivative markets, which effectively diverted attention from the panic associated with the second wave of the epidemic.

Summation

On the one hand, we could get used to the thought of the return of "old", "coronavirus" trends, that is, those in which the appetite for USD is constantly rising. On the other hand, we have a Fed policy which, as you can see, is capable of "sacrifices" in terms of regulations, which should be "rigid" to keep capital on the stock market at all costs. Other central banks usually follow the Federal Reserve. Therefore, there is a good chance for a global policy that would continue to intensively support economies.