The mid-term analytical review with trading recommendations from Olymp Trade experts is published with a focus on GDP dynamics in the key regions of the world as well as the initial results of U.S. President Joe Biden’s economic policies and the influence of these factors on the stock market.
Strongest Movements of the Past Month
- AUD/USD 3.84%… Which means that with $100 and a X100 multiplier, you could have easily made $384.
- NZD/USD 3.24%… Which means that with $100 and a X100 multiplier, you could have easily made $324.
- Twitter 10.83%… Which means that with $100 and a X20 multiplier, you could have easily made $216.60.
During the past month, global stock indices behaved very differently. While most European indices declined, the American S&P and NASDAQ did not let traders down and grew by 1.9% and 3.85% respectively. So what is happening in the world economies? Let’s find out.
America’s new president, Joe Biden, took leadership at a rather difficult time for the country. The crisis caused by the coronavirus has become a serious challenge for the U.S. economy. It is the pandemic situation in the world and in the U.S. in particular that is now having a major impact on the main economic indicator – GDP.
Biden conducted a vaccination program throughout the country and so far just under half of the entire population has been vaccinated. However, the virus can bring unpleasant surprises. Not so long ago, the new Indian covid-19 variant in Great Britain increased the infection rate by five times. Considering that about 50% of people in the U.K. have also been vaccinated, a new outbreak could put a stop to all the positive recovery momentum that we are now observing.
Now let’s go back a year. The main blow of the crisis certainly came in the 2 quarter of 2008 with an 8.4% decline.
As a result, by the end of 2020, U.S. GDP fell by 3.5%. The outcome was even worse than after the mortgage crisis when GDP fell by 2.5%. It was precisely then, 11 years ago, when the main economic indicator last encountered an annual drop.
Under the Biden administration, GDP grew by 4.3% in the 4th quarter of 2020, and the beginning of 2021 is also showing a positive dynamic of growth. The 1st quarter resulted with a total growth of 6.4%.
Naturally, GDP growth did not start out of nowhere, but was the result of the low interest rates policy and government bond buybacks by the Federal Reserve System. As a result, USD has dropped considerably. In the mid-term, we may expect that USD will strengthen. The growth of inflation will provoke the Fed to raise interest rates and cut back on QE, which means that the national currency may grow.
U.K. GDP data was also discouraging, if not shocking. For the second quarter of 2020 the economy fell by 21.5%. The economy lost about 4.3% for the year as a whole.
n other words, injecting additional money into the markets in order to stimulate economic growth. The M1 money supply skyrocketed from 2 trillion pounds in June 2020 to 2.25 trillion in 2021. The British QE program is calculated at 895 billion pounds. Against this background, the British FTSE-100 rose from 5,500 points to more than 7,000 points in practically half a year. Everything would be fine, if not for inflation…
Just like the U.S., the United Kingdom will need to take the path of further monetary tightening, which means raising interest rates over time. However, how much this will help the British pound remains to be seen. We think that the GBP/USD pair will continue to decline in the mid-term.
Australia and New Zealand GDP
The economies of Australia and New Zealand also suffered from the coronavirus crisis. Australia’s GDP dropped by 6% over the past year and New Zealand’s economy was even worse, falling by more than 11% in the middle of last year.
Currently, the situation is leveling off somewhat. Against the background of very low interest rates (in Australia 0.1%, and in New Zealand 0.25%), economists have noted the growth in GDP of these countries. During the 1 quarter of this year, Australia’s GDP grew by 1.8% and New Zealand’s GDP by 1.6%.
In the meantime, an interesting thing happened with these currencies. Because Americans have already begun to openly discuss the possibility of wrapping up the QE program, New Zealand and Australia have not yet given such clear signals. The AUD/USD and NZD/USD currency pairs declined in 2021. The Australian dollar fell from 0.8000 in February to almost 0.74000 (7.5%), and the New Zealand dollar dropped from 0.74600 to 0.69200 (7.2%).
In the mid-term, we expect that AUD/USD and NZD/USD will continue to decline. According to technical analysis, support for AUD/USD is at 0.70500 and support for NZD/USD is at 0.67000.
The situation with European GDP is also leveling off. Despite the fact that economic growth continues to be negative (GDP fell 1.3% in Q1 2021), there is no trace left of the horror when the economy fell by 15%.
Of course, the zero interest rate policy, along with quantitative easing, also helped. The ECB plans to inject about 1.85 trillion euros into the economy by the end of March 2022. Compared to the US Fed, the European Bank program looks much less serious.
As in the case of Australia and New Zealand, traders decided to sell the euro. EUR/USD fell from 1.23000 to 1.17000.
Most likely, the EUR/USD pair will continue to weaken. The first target is once again 1.17000.
A crisis cannot be resolved so easily. With any solution, there will be negative consequences. The most important thing now is the acceleration of inflation. For example, in the U.S. it is on a rise to a record 5% with the Fed’s target of 2%. The inflation in the U.S. has reached its highest rate since September 2008.
Federal Reserve officials say that the price pressure is due to supply chain problems and should end soon. However, there are certain doubts in this position and the rise of the inflation rate may be longer. Meanwhile, we are well aware that higher inflation will simply “eat up” some of the real growth of the economy.
We’ll find out what the growth projection is quite soon. On Thursday, July 29, the advance estimate GDP for the 2 estimate) and in September the (Final version), the numbers will be revised so the biggest influence on the markets will be at the moment of the first “advance” estimate.
According to the Atlanta Fed’s GDPNow forecast, U.S. GDP will grow by 11% in the 2nd quarter. At the same time, in order for the positive dynamics to continue, it is necessary for the growth to exceed 6.4%. This is the annual GDP forecast by the International Monetary Fund. If on July 29, the published data is lower than these numbers, USD will be under serious pressure and is likely to fall in the short term.
As for the long-term consequences for all economies, the acceleration of inflation may force regulators to reduce or even abandon their QE programs, and then begin to raise interest rates, which means that stock markets may decline significantly. So be prepared.