Sive Morten
Special Consultant to the FPA
- Messages
- 18,635
Fundamentals
This week we do not have a lot of data or events but something has broken in long-lasting mechanism of "stimulus trading machine" and "every time expectation of weaker dollar" . Despite dovish Powell's comments this week and expectation of J. Biden 2 Trln. stimulus plan dollar has become stronger. Why? Currently there are two reasons on the surface but it could be more later. First is, recent data doesn't support perspective of fast and furious recovery which hurts hunting for riskier assets. Second - stimulus could be treated in two ways and we talked about it last time. At first glance, when they are just announced, this is the reason to weak the dollar. But, in medium-term perspective, rising economical activity and interest rates supports national currency. As this week there are more headlines dedicated to interest rates - it seems that investors watch for second issue now, paying less attention to "more stimulus - weaker dollar" factor that has become classic already.
The dollar gained broadly on Monday as widening U.S. Treasury yields and expectations of more fiscal stimulus lifted the greenback against its rivals, with the euro falling to a two-week low. President-elect Joe Biden, who takes office on Jan. 20 with Democrats able to control both houses of Congress, has promised “trillions” in extra pandemic-relief spending. Ordinarily, the extra spending plans would force investors to worry about rising inflation and its detrimental impact on the U.S. dollar in a weak economy but the currency has been supported in recent weeks thanks to rising U.S. yields.
Measured in inflation-adjusted terms, U.S. 10-year real Treasury yields are rising faster than their European counterparts. As a result, the euro fell to $1.2167.
“It is hardly surprising that the recent acceleration in real U.S. yields has reminded the FX markets to end its focus on inflation and to assume a more comprehensive approach in its dollar valuation,” Commerzbank strategists said in a note. That means: things are not looking so bad for the dollar at present that EUR-USD levels of 1.2350 and above would currently be justified.”
The nominal yield on benchmark 10-year U.S. debt is up more than 20 basis points to 1.1187% this year. That has also prompted some investors to trim their bearish bets versus the dollar with net short bets on the greenback versus the euro declining to $21 billion compared to $24 billion two weeks earlier, according to latest positioning data.
Not only have markets brought forward bets on Fed interest rate increases to 2023, many also reckon it could start withdrawing, or tapering, asset purchases earlier.
The support from rising yields has so far trumped worries that the extra spending could trigger faster inflation. But many analysts expect the dollar to resume its decline as stimulus spending and vaccine rollouts brighten the global economic outlook.
ING analysts said Fed officials likely to pour cold water on any suggestion of slowing monetary stimulus support. “Any policy-related comments should – in our view – go in the direction of ruling out any unwinding of monetary stimulus in the foreseeable future,” they said. With the Fed’s rate expectations firmly at the bottom, any further rise in U.S. yields will remain a function of rising inflation expectations or term premium, which leaves us confident on our bearish-dollar call.”
Morgan Stanley, however, has recommended a neutral view on the dollar. It has closed a dollar-bearish trade versus the euro and the Canadian dollar and removed its bullish view on emerging market currencies, in part because U.S. real rates are likely “troughing”.
The greenback has also found support from expectations of a continued economic recovery in the United States, even as countries in Europe resort to lockdowns to fend off a second COVID-19 wave.
“You are seeing a continuance of the U.S. outperformance trade,” Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto.
The pop in the 10-year Treasury yield above 1% has put a firmer floor under the dollar, Joe Manimbo, senior market analyst at Western Union Business Solutions, said in a note.
Data on Wednesday showed U.S. consumer prices increased solidly in December amid a surge in the cost of gasoline, though underlying inflation remained tame as the COVID-19 pandemic weighed on the labor market and services industry.
“Overall, the firm headline December CPI gain was mostly due to an energy price pop that is extending into January, though lean readings for the core components suggest little risk of the inflation figures heating up anytime soon,” Michael Englund, chief economist at Action Economics, said in a note.
Sterling hit a seven-week high against the euro on Wednesday, building on gains during the previous session when the Bank of England’s governor dismissed the idea of negative interest rates, while optimism over the pace of Britain’s vaccination rollout also offered support.
"With labor really struggling, there's an argument that we could push for a higher stimulus number," said Edward Moya, senior market analyst, at OANDA in New York. "In the end, markets are anticipating that we're going to see more stimulus than what is expected in Biden's first 100 days and that's why we're seeing the dollar holding up."
Despite that expectations are high for the stimulus, but many analysts believe the spending push has already been priced in.
"We feel the fiscal cat is out of the bag already: it would take a lot to surprise markets after the re-pricing seen last week," ING analysts said. "The scope for the reflation trade to restart on the back of this announcement alone is limited."
Benjamin Melman, chief investment officer at Edmond de Rothschild AM, was also cautious. He said Biden might have to scale back his stimulus ambitions to get the plan through Congress.
Germany's economy shrank by 5% in 2020, less than expected and a smaller contraction than during the global financial crisis, as unprecedented government rescue and stimulus measures lessened the shock of the COVID-19 pandemic.
Powell said in a live-streamed interview with a Princeton University professor on Thursday that the economy remains far from where the Fed wants it to be, and that he sees no reason to alter its highly accommodative stance “until the job is well and truly done.”
“The implication is that monetary policy will remain loose for a long time, which will keep real yields negative and contain any further USD rallies,” Commonwealth Bank of Australia currency analyst Kim Mundy wrote in a note.
Although many analysts predict the greenback will resume the decline that saw it slide almost 7% last year versus major peers as the global economy recovers from the coronavirus pandemic, there is growing concern that the rise in yields will temper that weakness.
“The baseline case is still for a substantial acceleration in the global economy, which historically has proven to be positive for most currencies against the U.S. dollar,” said Westpac currency analyst Sean Callow. “But I think there is potential to at least have a debate over whether the U.S. dollar will be quite as weak as people expect.”
U.S. retail sales fell for a third straight month in December amid job losses and renewed measures to slow the spread of COVID-19, the Commerce Department reported on Friday, further evidence the economy lost speed at the end of 2020. The weak data dragged U.S. Treasury yields lower and U.S. stocks fell as investors turned more risk-averse on Friday.
“I feel that after all the optimism regarding vaccines, we are now living the reality of a very slow (vaccine) rollout, which is weighing heavily on business activity,” said Juan Perez, senior currency trader at Tempus Inc in Washington. “Until we have more guarantees on the medical front, markets will not continue to flourish despite whatever financial aid may be on the way,” Perez said.
Democratic President-elect Joe Biden on Thursday revealed a nearly $2 trillion proposal to address the COVID-19 pandemic and its economic harm that included $20 billion for vaccine distribution and $50 billion for testing. It builds on the $982 billion COVID-19 relief bill passed in December, more than tripling the funding allocated to state and local governments for vaccine distribution.
The dollar’s rebound from three-year lows, which began last week, may have some more room to run if the state of the economy worsens, but the currency’s longer-term outlook remained weak, analysts said. Data on Friday also showed U.S. producer prices rose moderately in December, suggesting that an anticipated pickup in inflation in the coming months will probably not be worrisome.
“While short-term, the U.S. dollar could extend further, the big-picture backdrop for the dollar remains negative,” MUFG currency strategist Derek Halpenny wrote in a note to clients.
Despite the recent rise in the dollar, speculators increased their net short dollar positions in the latest week, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday.
CV19 Update
As vaccination performance and timing comes on the first stage, it is interesting to see how long does it take to inoculate necessary amount of population. Fathom consulting releases the article on this subject.
The UK government has targeted 14 million vaccinations by mid-February, with the aim of providing initial doses to key workers, the clinically extremely vulnerable and the over-70s. To date, just over 2.8 million doses have been administered, approximately 20% of what would be required under a one-dose strategy (or 10% on the double-dose approach). If doses continue at the current rate of 1.4 million per week, that goal could be achieved by the middle of March, a month later than targeted. Of course, the rate ought to pick up as mass vaccination sites come on stream, and so mid-March may well be a pessimistic prediction. Meanwhile, early data from Germany and France suggest that it may take longer to administer the vaccine to the most vulnerable, and this may delay the reopening of the EU’s largest economies.
As many advanced economies start their programmes of vaccinations against COVID-19, Israel stands out as an example of effective and rapid distribution of doses among its population. Having, at great expense, precured an early and large quantity of the Pfizer/BioNTech vaccine, by the end of last week Israel had given 20% of its population at least one dose of the vaccine. That is a significantly higher proportion than any other country. Among advanced economies, the US is next in line — 2% of the population has received at least one dose.
So long as fiscal support packages keep pace with tougher lockdowns, then our expectation of a strong rebound in global economic activity, once the most vulnerable have been vaccinated, remains in place. Indeed, after an even longer period of reduced economic activity, and with even higher savings balances, the pace of the turnaround, and the associated risk of a sharp inflation pick-up, may be even greater than had been imagined back in November.
Next week to watch
On Wednesday, Joe Biden will be inaugurated as the 46th president of the United States, taking over the leadership of a country racked by COVID-19, deep socio-economic divisions and facing challenges to its global leadership role. Biden has proposed $1.9 trillion in stimulus with a commitment for $1,400 stimulus checks. Markets have cheered his win but are watching for clarity on spending and tackling the pandemic.
The S&P 500 has risen in the first 100 calendar days of eight out of the last 10 presidential terms, but Biden’s first 100 days may be more fraught than those of his predecessors. He needs to stimulate the economy quickly, but the slender Democrat majority in Congress means the size and timing of the package remain uncertain.
Germany changes the leader
After 15 years at the helm of Europe’s largest economy, German Chancellor Angela Merkel bows out this year. On Saturday, the Christian Democratic Union picks a new leader, who will likely become chancellor after September elections. Battling it out are centrist Armin Laschet, arch-conservative Friedrich Merz and foreign policy expert Norbert Roettgen. But Markus Soeder of the CDU’s Bavarian sister party, the Christian Social Union, might well upset the race.
For markets, the candidates’ attitudes to fiscal policy is key. Merkel, known affectionately as ‘Mutti’ or mother, jettisoned her party’s antagonism to deficits, spent more and accepted moving toward joint debt to save the euro zone. Merkel’s successor probably won’t backtrack completely but concerns linger nonetheless about how quickly Germany might pull back to fiscal orthodoxy under a new leader.
PMI's release
Economies were meant to be turning the corner in January but when “flash” business activity readings from the euro zone, the United States, Japan and Britain emerge on Friday - the first PMIs of 2021 - they may be more sombre than anticipated. While economic rebound bets still stand, activity curbs and a surging COVID-19 caseload are casting doubt over forecasts.
Having bounced off March troughs, global PMIs have seesawed of late just above 50. Economists expect IHS Markit’s flash Purchasing Managers’ Index (PMI) to show euro zone activity shrinking further after December’s contraction. PMI readings above 50 indicate growth and U.S. and UK surveys showed strong expansion last month, but the big question is whether that continues.
ECB Glass half-Full
The European Central Bank meets on Thursday. It unleashed extra stimulus a month ago but the new COVID-19 strain and a relatively slow vaccination pace are again clouding the economic outlook.
Cause for concern? Not so, comments from Christine Lagarde suggest. The ECB chief predicts recovery as COVID subsides, seeing the glass as half-full, not half-empty. Germany’s economy too is cause for optimism, shrinking by a less-than-expected 5% in 2020.
But prolonged lockdowns will hurt. Against this backdrop, markets will want the ECB to signal its commitment to using the full firepower of its 1.85 trillion-euro ($2.24 trillion)emergency bond-buying scheme - something on which policymakers appear to be split.
That's being said, guys - as you could see opinions split. We definitely could say that the topic of stimulus gradually is moving to backstage as it mostly priced-in already. As Joe Biden still could meet resistance in Congress when he will try to push big stimulus through it, markets do not expect now significantly greater amount of support from the government.
Interest rates gradually are taking the first place in minds of investors, and here is where major debates stand right now. As we could see there are two major camps. The first one suggests that as performance of US economy stands weak and Fed keeps dovish policy - real interest rates keep going down in negative territory. Because Fed keeps rate flat while inflation expectations are growing. This should become the headwind to the dollar. Second camp suggests the opposite direction - stimulus should trigger rising of economical activity, supported by vaccination where US unexpectedly has good performance by the way. Rising activity should release public savings for spending that boosts consumption and sales, let reduce stimulus amount after some time and make Fed to think about policy change. Second camp suggests that in medium-term perspective dollar should rise.
Besides, Fed policy is not something static. Today they do not see any signs but tomorrow they could see it. Everything depends on economy performance. Another important reason in favor of second camp is "trading by rumors". Markets move in advance, on anticipation with enough lead to events. Thus, the tendency could start when statistics still shows no clear signs but changes are in the air.
Recall what ING Bank said above - any further rise in U.S. yields will remain a function of rising inflation expectations or term premium, which leaves us confident on our bearish-dollar call.” And While short-term, the U.S. dollar could extend further, the big-picture backdrop for the dollar remains negative,” MUFG
This is the hypothesis that we have to check in near-term, within few months probably. Where recent jump in interest rate, and consequently in US dollar value is temporal and market will pullback under impact of weak statistics for IV and I Q of 2021 decreasing inflationary expectations... This is the central question that should be resolved and depending on the answer we will get major direction on the markets. Fathom stands more in favor of second camp as they also see big inflationary risks if economy starts to show confident steps out of pandemic to recovery - with even higher savings balances, the pace of the turnaround, and the associated risk of a sharp inflation pick-up, may be even greater than had been imagined back in November.
How we could check this? This is easy - just wait for major statistics in January, including retail sales, IV Q 2020 GDP data and NFP release in February and we will see. Statistics is promised to be poor, at least GDP with high degree of certainty should be negative. If no impact on inflation and interest rates follows - second camp wins and we should prepare to US Dollar rally. Otherwise, everything stands in the same direction by far.
Technicals
Monthly
On monthly chart we do not see any big impact of recent events yet. The existed tendency mostly stands intact, keeping bullish context. Since it is just two weeks till the end of the January, when data should be released, monthly picture hardly will change significantly till this moment.
As we've said last week EUR feels some resistance pressure as it is entering zone of 1.25 Fib level and natural support/resistance area. Trend is bullish here, market is not at overbought. Technical picture suggests that we could accept any pullback with no problems to bullish context while it stands above 1.16 lows. The invalidation point, by the way, agrees with Yearly Pivot point that has special meaning to us. Although it is preferable to the market to stay above 1.20, just to keep short-term bullish context either.
Drop below 1.16 breaks the normal market mechanics as major retracement and reaction to COP is done. Thus, another deep retracement here is not logical and should not happen. Besides, action below 1.16 means appearing of bearish reversal swing. It is not necessary leads to bearish collapse and drop below 1.02 but deeper downside action happens and we would have to forget about bullish positions on lower time frames.
Weekly
Last week we've expressed concern on price action, suggesting that EUR could go lower, leaving XOP target untouched by far. Week has closed at tail, turning MACD trend bearish without any hint on the grabber. And we've got bearish divergence instead. Now price stands at first Fib support of 1.2060 area, where some upside reaction could be through the next week. But, the pace of recent sell-off keeps door open for another drop to major weekly support area - 1.19 K-support and oversold level:
Daily
On daily chart market has confirmed our worry that it could go down further. Indeed, flag has been broken as it should to, ignoring intraday W&R pattern. As price stands near oversold downside action is promised to be gradual, not too fast. Next support area is 1.20 around broken top. Thus, it seems that 1.19-1.2050 is solid support cluster that includes four different Fib levels, that forming side-by-side K-areas.
Intraday
So, here is our major AB-CD pattern. OP stands at 1.2005 that is inside daily K-area, making Agreement with it. Here we should not forget about 1.2063 which is weekly Fib level and could trigger the bounce.
And here is what we intend to keep an eye on Monday. Our startup AB-CD pattern has 1.2064 XOP that perfectly agrees with weekly Fib support. Once bounce starts (if any), 1.2160 K-area seems interesting for short-entry by far. Scalp traders also could focus on recent thrust where fast DiNapoli patterns could be formed - either B&B or DRPO.
This week we do not have a lot of data or events but something has broken in long-lasting mechanism of "stimulus trading machine" and "every time expectation of weaker dollar" . Despite dovish Powell's comments this week and expectation of J. Biden 2 Trln. stimulus plan dollar has become stronger. Why? Currently there are two reasons on the surface but it could be more later. First is, recent data doesn't support perspective of fast and furious recovery which hurts hunting for riskier assets. Second - stimulus could be treated in two ways and we talked about it last time. At first glance, when they are just announced, this is the reason to weak the dollar. But, in medium-term perspective, rising economical activity and interest rates supports national currency. As this week there are more headlines dedicated to interest rates - it seems that investors watch for second issue now, paying less attention to "more stimulus - weaker dollar" factor that has become classic already.
The dollar gained broadly on Monday as widening U.S. Treasury yields and expectations of more fiscal stimulus lifted the greenback against its rivals, with the euro falling to a two-week low. President-elect Joe Biden, who takes office on Jan. 20 with Democrats able to control both houses of Congress, has promised “trillions” in extra pandemic-relief spending. Ordinarily, the extra spending plans would force investors to worry about rising inflation and its detrimental impact on the U.S. dollar in a weak economy but the currency has been supported in recent weeks thanks to rising U.S. yields.
Measured in inflation-adjusted terms, U.S. 10-year real Treasury yields are rising faster than their European counterparts. As a result, the euro fell to $1.2167.
“It is hardly surprising that the recent acceleration in real U.S. yields has reminded the FX markets to end its focus on inflation and to assume a more comprehensive approach in its dollar valuation,” Commerzbank strategists said in a note. That means: things are not looking so bad for the dollar at present that EUR-USD levels of 1.2350 and above would currently be justified.”
The nominal yield on benchmark 10-year U.S. debt is up more than 20 basis points to 1.1187% this year. That has also prompted some investors to trim their bearish bets versus the dollar with net short bets on the greenback versus the euro declining to $21 billion compared to $24 billion two weeks earlier, according to latest positioning data.
Not only have markets brought forward bets on Fed interest rate increases to 2023, many also reckon it could start withdrawing, or tapering, asset purchases earlier.
The support from rising yields has so far trumped worries that the extra spending could trigger faster inflation. But many analysts expect the dollar to resume its decline as stimulus spending and vaccine rollouts brighten the global economic outlook.
ING analysts said Fed officials likely to pour cold water on any suggestion of slowing monetary stimulus support. “Any policy-related comments should – in our view – go in the direction of ruling out any unwinding of monetary stimulus in the foreseeable future,” they said. With the Fed’s rate expectations firmly at the bottom, any further rise in U.S. yields will remain a function of rising inflation expectations or term premium, which leaves us confident on our bearish-dollar call.”
Morgan Stanley, however, has recommended a neutral view on the dollar. It has closed a dollar-bearish trade versus the euro and the Canadian dollar and removed its bullish view on emerging market currencies, in part because U.S. real rates are likely “troughing”.
The greenback has also found support from expectations of a continued economic recovery in the United States, even as countries in Europe resort to lockdowns to fend off a second COVID-19 wave.
“You are seeing a continuance of the U.S. outperformance trade,” Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto.
The pop in the 10-year Treasury yield above 1% has put a firmer floor under the dollar, Joe Manimbo, senior market analyst at Western Union Business Solutions, said in a note.
Data on Wednesday showed U.S. consumer prices increased solidly in December amid a surge in the cost of gasoline, though underlying inflation remained tame as the COVID-19 pandemic weighed on the labor market and services industry.
“Overall, the firm headline December CPI gain was mostly due to an energy price pop that is extending into January, though lean readings for the core components suggest little risk of the inflation figures heating up anytime soon,” Michael Englund, chief economist at Action Economics, said in a note.
Sterling hit a seven-week high against the euro on Wednesday, building on gains during the previous session when the Bank of England’s governor dismissed the idea of negative interest rates, while optimism over the pace of Britain’s vaccination rollout also offered support.
"With labor really struggling, there's an argument that we could push for a higher stimulus number," said Edward Moya, senior market analyst, at OANDA in New York. "In the end, markets are anticipating that we're going to see more stimulus than what is expected in Biden's first 100 days and that's why we're seeing the dollar holding up."
Despite that expectations are high for the stimulus, but many analysts believe the spending push has already been priced in.
"We feel the fiscal cat is out of the bag already: it would take a lot to surprise markets after the re-pricing seen last week," ING analysts said. "The scope for the reflation trade to restart on the back of this announcement alone is limited."
Benjamin Melman, chief investment officer at Edmond de Rothschild AM, was also cautious. He said Biden might have to scale back his stimulus ambitions to get the plan through Congress.
Germany's economy shrank by 5% in 2020, less than expected and a smaller contraction than during the global financial crisis, as unprecedented government rescue and stimulus measures lessened the shock of the COVID-19 pandemic.
Powell said in a live-streamed interview with a Princeton University professor on Thursday that the economy remains far from where the Fed wants it to be, and that he sees no reason to alter its highly accommodative stance “until the job is well and truly done.”
“The implication is that monetary policy will remain loose for a long time, which will keep real yields negative and contain any further USD rallies,” Commonwealth Bank of Australia currency analyst Kim Mundy wrote in a note.
Although many analysts predict the greenback will resume the decline that saw it slide almost 7% last year versus major peers as the global economy recovers from the coronavirus pandemic, there is growing concern that the rise in yields will temper that weakness.
“The baseline case is still for a substantial acceleration in the global economy, which historically has proven to be positive for most currencies against the U.S. dollar,” said Westpac currency analyst Sean Callow. “But I think there is potential to at least have a debate over whether the U.S. dollar will be quite as weak as people expect.”
U.S. retail sales fell for a third straight month in December amid job losses and renewed measures to slow the spread of COVID-19, the Commerce Department reported on Friday, further evidence the economy lost speed at the end of 2020. The weak data dragged U.S. Treasury yields lower and U.S. stocks fell as investors turned more risk-averse on Friday.
“I feel that after all the optimism regarding vaccines, we are now living the reality of a very slow (vaccine) rollout, which is weighing heavily on business activity,” said Juan Perez, senior currency trader at Tempus Inc in Washington. “Until we have more guarantees on the medical front, markets will not continue to flourish despite whatever financial aid may be on the way,” Perez said.
Democratic President-elect Joe Biden on Thursday revealed a nearly $2 trillion proposal to address the COVID-19 pandemic and its economic harm that included $20 billion for vaccine distribution and $50 billion for testing. It builds on the $982 billion COVID-19 relief bill passed in December, more than tripling the funding allocated to state and local governments for vaccine distribution.
The dollar’s rebound from three-year lows, which began last week, may have some more room to run if the state of the economy worsens, but the currency’s longer-term outlook remained weak, analysts said. Data on Friday also showed U.S. producer prices rose moderately in December, suggesting that an anticipated pickup in inflation in the coming months will probably not be worrisome.
“While short-term, the U.S. dollar could extend further, the big-picture backdrop for the dollar remains negative,” MUFG currency strategist Derek Halpenny wrote in a note to clients.
Despite the recent rise in the dollar, speculators increased their net short dollar positions in the latest week, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday.
CV19 Update
As vaccination performance and timing comes on the first stage, it is interesting to see how long does it take to inoculate necessary amount of population. Fathom consulting releases the article on this subject.
The UK government has targeted 14 million vaccinations by mid-February, with the aim of providing initial doses to key workers, the clinically extremely vulnerable and the over-70s. To date, just over 2.8 million doses have been administered, approximately 20% of what would be required under a one-dose strategy (or 10% on the double-dose approach). If doses continue at the current rate of 1.4 million per week, that goal could be achieved by the middle of March, a month later than targeted. Of course, the rate ought to pick up as mass vaccination sites come on stream, and so mid-March may well be a pessimistic prediction. Meanwhile, early data from Germany and France suggest that it may take longer to administer the vaccine to the most vulnerable, and this may delay the reopening of the EU’s largest economies.
As many advanced economies start their programmes of vaccinations against COVID-19, Israel stands out as an example of effective and rapid distribution of doses among its population. Having, at great expense, precured an early and large quantity of the Pfizer/BioNTech vaccine, by the end of last week Israel had given 20% of its population at least one dose of the vaccine. That is a significantly higher proportion than any other country. Among advanced economies, the US is next in line — 2% of the population has received at least one dose.
So long as fiscal support packages keep pace with tougher lockdowns, then our expectation of a strong rebound in global economic activity, once the most vulnerable have been vaccinated, remains in place. Indeed, after an even longer period of reduced economic activity, and with even higher savings balances, the pace of the turnaround, and the associated risk of a sharp inflation pick-up, may be even greater than had been imagined back in November.
Next week to watch
On Wednesday, Joe Biden will be inaugurated as the 46th president of the United States, taking over the leadership of a country racked by COVID-19, deep socio-economic divisions and facing challenges to its global leadership role. Biden has proposed $1.9 trillion in stimulus with a commitment for $1,400 stimulus checks. Markets have cheered his win but are watching for clarity on spending and tackling the pandemic.
The S&P 500 has risen in the first 100 calendar days of eight out of the last 10 presidential terms, but Biden’s first 100 days may be more fraught than those of his predecessors. He needs to stimulate the economy quickly, but the slender Democrat majority in Congress means the size and timing of the package remain uncertain.
Germany changes the leader
After 15 years at the helm of Europe’s largest economy, German Chancellor Angela Merkel bows out this year. On Saturday, the Christian Democratic Union picks a new leader, who will likely become chancellor after September elections. Battling it out are centrist Armin Laschet, arch-conservative Friedrich Merz and foreign policy expert Norbert Roettgen. But Markus Soeder of the CDU’s Bavarian sister party, the Christian Social Union, might well upset the race.
For markets, the candidates’ attitudes to fiscal policy is key. Merkel, known affectionately as ‘Mutti’ or mother, jettisoned her party’s antagonism to deficits, spent more and accepted moving toward joint debt to save the euro zone. Merkel’s successor probably won’t backtrack completely but concerns linger nonetheless about how quickly Germany might pull back to fiscal orthodoxy under a new leader.
PMI's release
Economies were meant to be turning the corner in January but when “flash” business activity readings from the euro zone, the United States, Japan and Britain emerge on Friday - the first PMIs of 2021 - they may be more sombre than anticipated. While economic rebound bets still stand, activity curbs and a surging COVID-19 caseload are casting doubt over forecasts.
Having bounced off March troughs, global PMIs have seesawed of late just above 50. Economists expect IHS Markit’s flash Purchasing Managers’ Index (PMI) to show euro zone activity shrinking further after December’s contraction. PMI readings above 50 indicate growth and U.S. and UK surveys showed strong expansion last month, but the big question is whether that continues.
ECB Glass half-Full
The European Central Bank meets on Thursday. It unleashed extra stimulus a month ago but the new COVID-19 strain and a relatively slow vaccination pace are again clouding the economic outlook.
Cause for concern? Not so, comments from Christine Lagarde suggest. The ECB chief predicts recovery as COVID subsides, seeing the glass as half-full, not half-empty. Germany’s economy too is cause for optimism, shrinking by a less-than-expected 5% in 2020.
But prolonged lockdowns will hurt. Against this backdrop, markets will want the ECB to signal its commitment to using the full firepower of its 1.85 trillion-euro ($2.24 trillion)emergency bond-buying scheme - something on which policymakers appear to be split.
That's being said, guys - as you could see opinions split. We definitely could say that the topic of stimulus gradually is moving to backstage as it mostly priced-in already. As Joe Biden still could meet resistance in Congress when he will try to push big stimulus through it, markets do not expect now significantly greater amount of support from the government.
Interest rates gradually are taking the first place in minds of investors, and here is where major debates stand right now. As we could see there are two major camps. The first one suggests that as performance of US economy stands weak and Fed keeps dovish policy - real interest rates keep going down in negative territory. Because Fed keeps rate flat while inflation expectations are growing. This should become the headwind to the dollar. Second camp suggests the opposite direction - stimulus should trigger rising of economical activity, supported by vaccination where US unexpectedly has good performance by the way. Rising activity should release public savings for spending that boosts consumption and sales, let reduce stimulus amount after some time and make Fed to think about policy change. Second camp suggests that in medium-term perspective dollar should rise.
Besides, Fed policy is not something static. Today they do not see any signs but tomorrow they could see it. Everything depends on economy performance. Another important reason in favor of second camp is "trading by rumors". Markets move in advance, on anticipation with enough lead to events. Thus, the tendency could start when statistics still shows no clear signs but changes are in the air.
Recall what ING Bank said above - any further rise in U.S. yields will remain a function of rising inflation expectations or term premium, which leaves us confident on our bearish-dollar call.” And While short-term, the U.S. dollar could extend further, the big-picture backdrop for the dollar remains negative,” MUFG
This is the hypothesis that we have to check in near-term, within few months probably. Where recent jump in interest rate, and consequently in US dollar value is temporal and market will pullback under impact of weak statistics for IV and I Q of 2021 decreasing inflationary expectations... This is the central question that should be resolved and depending on the answer we will get major direction on the markets. Fathom stands more in favor of second camp as they also see big inflationary risks if economy starts to show confident steps out of pandemic to recovery - with even higher savings balances, the pace of the turnaround, and the associated risk of a sharp inflation pick-up, may be even greater than had been imagined back in November.
How we could check this? This is easy - just wait for major statistics in January, including retail sales, IV Q 2020 GDP data and NFP release in February and we will see. Statistics is promised to be poor, at least GDP with high degree of certainty should be negative. If no impact on inflation and interest rates follows - second camp wins and we should prepare to US Dollar rally. Otherwise, everything stands in the same direction by far.
Technicals
Monthly
On monthly chart we do not see any big impact of recent events yet. The existed tendency mostly stands intact, keeping bullish context. Since it is just two weeks till the end of the January, when data should be released, monthly picture hardly will change significantly till this moment.
As we've said last week EUR feels some resistance pressure as it is entering zone of 1.25 Fib level and natural support/resistance area. Trend is bullish here, market is not at overbought. Technical picture suggests that we could accept any pullback with no problems to bullish context while it stands above 1.16 lows. The invalidation point, by the way, agrees with Yearly Pivot point that has special meaning to us. Although it is preferable to the market to stay above 1.20, just to keep short-term bullish context either.
Drop below 1.16 breaks the normal market mechanics as major retracement and reaction to COP is done. Thus, another deep retracement here is not logical and should not happen. Besides, action below 1.16 means appearing of bearish reversal swing. It is not necessary leads to bearish collapse and drop below 1.02 but deeper downside action happens and we would have to forget about bullish positions on lower time frames.
Weekly
Last week we've expressed concern on price action, suggesting that EUR could go lower, leaving XOP target untouched by far. Week has closed at tail, turning MACD trend bearish without any hint on the grabber. And we've got bearish divergence instead. Now price stands at first Fib support of 1.2060 area, where some upside reaction could be through the next week. But, the pace of recent sell-off keeps door open for another drop to major weekly support area - 1.19 K-support and oversold level:
Daily
On daily chart market has confirmed our worry that it could go down further. Indeed, flag has been broken as it should to, ignoring intraday W&R pattern. As price stands near oversold downside action is promised to be gradual, not too fast. Next support area is 1.20 around broken top. Thus, it seems that 1.19-1.2050 is solid support cluster that includes four different Fib levels, that forming side-by-side K-areas.
Intraday
So, here is our major AB-CD pattern. OP stands at 1.2005 that is inside daily K-area, making Agreement with it. Here we should not forget about 1.2063 which is weekly Fib level and could trigger the bounce.
And here is what we intend to keep an eye on Monday. Our startup AB-CD pattern has 1.2064 XOP that perfectly agrees with weekly Fib support. Once bounce starts (if any), 1.2160 K-area seems interesting for short-entry by far. Scalp traders also could focus on recent thrust where fast DiNapoli patterns could be formed - either B&B or DRPO.
