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Week Ahead – Fed Meets as Virus Storm Worsens; US and Eurozone Set for Historic GDP Collapse

As US politicians squabble over the next fiscal stimulus bill and the country’s virus death toll ticks up again, markets may lean on the Federal Reserve next week for a quick fix. The Federal Open Market Committee (FOMC) meeting will undoubtedly be the most eagerly awaited event of the week. But second quarter GDP prints out of the United States and the euro area will not be far behind as the full extent of the economic shock from COVID-19 is laid bare. In the meantime, as tensions between the US and China continue to simmer, how much longer will traders be able to brush this risk under the carpet?Fed may not ease virus and stimulus jitters

Cracks have started to appear of late in America’s economic recovery from the pandemic as the resurgence of virus cases has forced several states to halt or even reverse the easing of lockdown restrictions. But the prospect of the US falling behind the recovery curve has merely taken the steam out of the incredible stock market rally rather than spark panic selling. That is because investors are certain that fiscal and monetary stimulus will be there to save the day once again.

However, this time round, a fresh round of stimulus may not arrive quite as quickly as markets are anticipating. Many are expecting the Fed to strengthen its forward guidance on how long the ultra-loose policy will stay in place when it announces its July FOMC decision on Wednesday. But after Chairman Powell famously said he was not “not even thinking about thinking about raising rates” at the last meeting, policymakers may not see the need to go beyond that statement at this point.

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After all, as the virus situation is still unfolding in the US and it’s too early to get a good read on the state of the recovery, the Fed will be hesitant to give out more precise forward guidance so soon. At best, Powell will probably address concerns about the unexpected shrinkage of the Fed’s balance sheet in recent weeks as well as maybe fine tune some of the emergency lending facilities.

Besides, all it might take is some reassuring words from Powell to quash fears about the Fed scaling back its bond purchases too quickly. But it may not be quite so simple when it comes to Congress agreeing on another virus relief bill.

Aside from the fact that the Republicans and the Democrats are so far apart on the size and content of the next fiscal package, there are divisions within the Republican party, amid growing worries by some about the ballooning deficit. Thus, it’s quite possible that lawmakers will only agree to a stopgap bill while negotiations drag on.

US GDP and consumption data eyed

Disappointment from the Fed and Capitol Hill is the biggest threat to risk appetite in the near term, posing a downside danger for stocks and an upside one for the dollar. Although with its haven-like status diminishing slightly, the greenback may no longer get much of a boost from increased risk aversion. But for risk assets, the moves are likely to be exacerbated if any stimulus setback is complemented by weak data out of the US.

Durable goods orders out on Monday are forecast for a 6.5% monthly gain in Jun