US GDP: Economy will not improve, USD to continue the slump

The US economy shrank by a historic 32.9%, better than expected, but as coronavirus continues raging in America in the third quarter, setting the stage for a prolonged recession, the US dollar has room to resume its falls while the stock market rally seems vulnerable, FXStreet’s analyst Yohay Elam briefs.

Key quotes

“Better than expected – the green on the screen masks a devastating drop of 32.9% annualized in US GDP in the second quarter, the worst in history. Expectations stood at -34.1%, so that counts as a beat. Nevertheless, the statistics reflect significant suffering – a crash of 27% in business investment, a collapse of 64.1% in exports, more halving of imports, 53.1%, and a collapse of personal consumption by 34.6%.”

“The third quarter is unlikely to be worse than the second one – but another contraction cannot be ruled out. After a drop of nearly a third, a bounce of 50% is needed for a V-shaped recovery – a pipe dream given the virus and diminishing support from Washington.”

“While US economic troubles may send safe-haven flows to the dollar, the prospects of further support from the Fed may weaken it. Currencies of countries that have more successfully fought the coronavirus may rise.”

“Gold and silver may remain beneficiaries as well, boosted by more stimulus.” 

“The S&P 500 Index has been on a tear – returning to positive territory for the year. However, these figures may begin sealing a ceiling above stocks. Are equities ready to fall? It may take time for a significant bear market to reemerge. Nevertheless, the rally’s end is nigh.”