What does Biden’s stimulus plan mean for the US Dollar?
Joe Perry January 16, 2021 12:04 AM
Markets are forward looking. This may be the opportunity to “buy the fact”!
On Thursday evening, President-elect Joe Biden unveiled a $1.9 trillion stimulus package to help Americans due to the economic impact of the coronavirus. The package includes an additional $1400 in direct payment per person, which would result in the $2,000 amount President Trump was asking. Biden will have an easier path to pass his stimulus bill than President Trump, as Democrats will control both the House and the Senate come January 20th. In addition, according to the New York Times, Biden’s stimulus plan will also include:
- $440 billion to help local officials fight the virus
- $160 billion in a national vaccine program
- $130 billion for schools
- Extension of unemployment benefits through September
Early forecasts of the size of the stimulus package was for $1.5 trillion. Bumping it to $1.9 trillion will help Biden in the negotiation with Republicans. What will a package of this size mean for the US Dollar? Although the amount is less than the $3.4 trillion in aid from the HEROS act, an amount with “trillion” is still significant! Since the pandemic hit the US in full force in March, the abundance of both monetary and fiscal stimulus has helped weaken the US Dollar index from a high of 103.00 to recent lows at 89.20.
Source: Tradingview, City Index
Theoretically, $1.9 trillion of stimulus added to the US economy should mean a lower US Dollar. However, don’t expect Biden’s stimulus package to have the same effect on the US Dollar as the previous stimulus package. When the first package was passed, the world was in the early stages of understanding the virus. Although many countries are still trying to control the virus via lockdowns and restrictions, experts have more knowledge of the virus. In addition, vaccines are available and will become more widely available come Q2, as warmer weather approaches. With the near 13.4% depreciation in the US Dollar in March and the Federal Reserve on hold (for now), could the stimulus package lead to a move higher in the US Dollar? In this case it would be a reverse of the adage “Buy the rumor, sell the fact”. For the US Dollar it could be a case of “Sell the rumor, buy the fact”.
Markets are forward looking. A year into the pandemic, Joe Biden is proposing an additional $1.9 trillion in aid. “How much more stimulus can the government afford?” is the question investors need to be asking themselves. If traders don’t think there is much left in the tank, the US Dollar should head higher!
Technically, the US Dollar Index has already broken out of a descending wedge on the daily timeframe. The target price on the breakout of a descending wedge is a 100% retracement, which would put price near 94.55, which is also the 38.2% Fibonacci retracement of the highs from March 2020 to the recent lows on January 7th and horizontal resistance from the March 2020 lows. Price must first pass through strong horizontal resistance near 92.17. Support below is at the January 7th lows of 89.20. Below there is a series of lows from early 2018 near 88.25/88.50 and then horizontal support from 2013 near 84.40.
Source: Tradingview, City Index
Biden’s stimulus plan provides an abundance of US Dollars into the economy, which theoretically should push the value of the US Dollar lower. However, markets are forward looking, and this may be the opportunity to “buy the fact”!
Learn more about forex trading opportunities.
This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.
StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.
In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.
StoneX Financial Pte. Ltd. is not under any obligation to update this report.
Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.