Infrastructure plan bullish for USD

Hi Everyone,

Joe Biden revealed the details of his US $2.25 trillion infrastructure stimulus plan last Wednesday. The key areas of interest, as expected, are modernizing infrastructure and upgrading manufacturing, research and development, as well as addressing climate change. The second plan, expected later this month, would be targeted at childcare and healthcare programs. A number of sectors, among them semiconductors, jumped to all-time highs while the dollar established a new support level, trending still higher.

Biden’s proposal would include US $600 billion to infrastructure, combined with US $400 billion to broadband and manufacturing and US $600 billion to social coverage and housing. The bill will be financed over 8 years by increasing borrowing from global markets on top of the current outstanding public debt of 100% to GD.

This push will also be boosted by increasing corporate tax rate from current 21% to 28%. American corporate tax rate was cut from 35% in 2017 by President Trump. A number of key Republicans, including the Minority Leader Mitch McConnell, have expressed their skepticism towards the plan and ensuing tax increases on the premise that the economy has bounced back strongly. Most likely, the proposal in its current shape will not pass, albeit the main tenants might be approved as separate smaller bills.

Latest manufacturing PMI in the States exploded to 64.7 in March, exceeding the consensus expectation of 61.3. Also, non-farm payroll data published last week showed the economy added 916,000 jobs in March, while February numbers were also revised higher to 468,000. The US has added 1.58 million jobs during Q1, bringing unemployment rate to 6%. However, U-6 unemployment is still uncomfortably high at 10.7%.

Biden’s key focus on infrastructure, including building roads and bridges but also electric vehicle charging stations, is long overdue. The US has not had a large-scale infrastructure upgrade for decades, pushing the country down to the 13th place in the global infrastructure quality list. In addition to modernizing infrastructure, the US also must address the challenge posed by China for global dominance in technology and general leadership. The rivalry has been brewing for years but has been amplified recently with the onset of the pandemic. Countries, including the US and China, have been withdrawing from globalization by expatriating supply chains in order to protect food supply, technological advancement, national defense and their pharmaceuticals industry. Leaders of both the PRC and the United States have been rather outspoken about the ongoing competition and strategies to enhance their own positions. The situation has been amplified by a global shortage of semiconductors, causing disruptions in the manufacturing of anything from autos to refrigerators. The semiconductors industry has been identified by both leaders as a key industry for technological dominance, as well as for national security.

Semiconductors ETF SOXX jumped 4.33% last week to a new all-time-high at the back of Biden’s announcement. Also, Nasdaq-100 pierced 50-day simple moving average resistance, turning bullish. Other sectors that closed at all-time-highs were homebuilders, transportation and industrials. The US dollar gave up some of the gains at the back of the announcement but closed the week up 0.31%. The dollar, measured by DXY, continues in an upward trajectory, still in overbought territory with key resistance near 93.44 and support near 92.94. Momentum indicators support a strong bullish trend on daily and weekly charts.

Major indexes were all up with S&P 500 piercing another all-time-high, closing the week higher +1.14% at 4,019.88 points. Nasdaq-100 rose +2.70% to 13,329.50 while Russell 2000 gained +1.46% at 2,253.90. DXY shed -0.02%, while gold slipped -0.17%. Oil futures closed higher +0.79%.

Have a great trading week ahead!

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In The Spotlight

DateCurrencyEventPrevious Consensus 
MondayUSDISM Services PMI – Mar55.358.5
TuesdayAUDRBA Interest Rate Statement and Decision0.1%0.1%
WednesdayUSDFOMC Minutes
ThursdayUSDFed’s Chair Powell Speech
FridayCNYConsumer Price Index (YoY) – Mar-0.2%-0.4%
FridayCADUnemployment Rate – Mar8.2%8%

*In USD thousands

• U.S. ISM Services PMI
The Purchasing Managers’ Index (PMI) measures the sentiment for business activity. This is survey based and considered as a leading indicator. Additionally, preliminary reading offers visibility on the economic activity for the ongoing month. Manufacturing PMI reported last week showed much higher than expected economic activity (64.7 vs 61.3). Higher than expected print is generally bullish for the currency, while lower than expected is bearis

• Chinese Consumer Price Index
CPI, or inflation, measures the rise in consumer prices in an economy over a certain period of time. Higher inflation means that consumer prices have grown compared to the previous period. Higher than expected rate may be both positive or negative for CNY as the market does not like inflation expectations too far off from consensus. Generally, both high and negative inflation are bearish for currency, while positive and low inflation, in line with expectations, is bullish.

Market Sentiment

EURUSD pair has recovered from swing lows of 1.17041, after being forced below the 200-day simple moving average (SMA) a week earlier. Momentum is still bearish for upcoming days and weeks based on the daily chart. 8-day exponential moving average (EMA) offers resistance near 1.17730. RSI is neutral and moving sideways while stochastic of 16 signals oversold levels since March 25th. ADX of 32 indicates there is force in the bearish momentum. Resistance has formed near 1.17645 and 1.17730. Support is near 1.17440 and 1.17360.

Resistance: 1.17645
Support: 1.17440

GBPUSD is consolidating near 1.38000 with moving averages roped and giving little guidance about the trend on the daily chart. 8-day EMA is offering support near 1.38170, while resistance has formed near the 50-day SMA of 1.38460. 200-day SMA is below the price but there is no clear trend at this point, signaling that the price may move sideways for the next few days. RSI and stochastic are both neutral while DMI-s and ADX do not give a quality signal. Weekly chart is bullish both short-term and long-term. Resistance levels have formed near 1.38460 and 1.38635, while support is near 1.38020 and 1.37800.

Resistance: 1.38460
Support: 1.38020

NZDUSD pair is attempting to break 8-day EMA resistance near 0.70190. There is little volume and energy in the momentum, although moving averages signal bearish trends for the upcoming days and weeks. RSI and Stochastic are both neutral near 41 and 20, while ADX and DMI-s do not give a quality signal. Weekly chart is also undecided about the momentum, although 200-week SMA is about to cross below 50-week SMA, forming a Golden Cross. Daily resistance is near 0.70280 and 0.70385, while support is near 0.70180 and 0.70120.

Resistance: 0.70280
Support: 0.70180

XAUUSD has pierced 8-day EMA resistance and testing now 21-day EMA near 1,730.42. Price seems to be consolidating and potentially moving sideways for the next few days. Momentum indicators signal bearish trend with 34-, 50-, 100- and 200-day MA-s above the price. RSI and Stochastic are both neutral while ADX of 35 signals strong energy in the trend. Resistance levels are near 1,730.42 and 1,739.48, while support is 1,720.73 and 1,718.14.

Resistance: 1,730.42
Support: 1,720.73

Kaia Parv, CFA, is an experienced Portfolio and Investment Manager with exposure to both public and private markets. Before joining FXPRIMUS, Kaia was a Senior Investment Associate at EFA Group and a Vice President in Bank of America Merrill Lynch.

Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

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