14-Jan-2021

1) EUR/USD: Biden Knocks Euro Down; Powell May Send It over the Edge
2) Dollar Extends Rebound As Investors Await US Stimulus Details
3) GBP/USD: Third Time’s a Charm? Why a New Attack on 1.37 Might Succeed

1) EUR/USD: Biden Knocks Euro Down; Powell May Send It over the Edge

More government money is better for the dollar – at least when it comes to fiscal stimulus. Media reports that President-elect Joe Biden is set to announce a generous stimulus package worth some $2 trillion has boosted markets and the dollar. Investors had speculated that the scope of the relief would hover around $1.3 trillion.

An increase in government debt triggered a move to stocks from bonds, pushing US Treasury yields higher and making the dollar more attractive. Moreover, with additional support from Uncle Sam, the world’s largest economy could grow at a faster clip, another boost to the underlying currency.

Biden speaks only at 00:15 early on Friday, and reports from Washington could provide additional details about the package. It is set to include direct payments to all Americans, expanded unemployment benefits, and aid to state and local governments.

Will the Federal Reserve buy additional US debt and push the dollar back down? Or will it see rising yields as a sign of upcoming economic strength and even consider tapering its scheme? Several officials at the Fed have been rejecting the option of an early reduction in debt purchases  – but the mere discussion about scaling the program down rather than expanding it has been supporting the dollar.

Jerome Powell, Chairman of the Federal Reserve, has the final word – and he speaks on Thursday, ahead of Biden. The world’s most powerful central banker does not need to address the Fed’s $120 billion/month scheme – only comment about the future. If he is optimistic, the dollar could rise, and if he is cautious, it could fall.

The fiscal/monetary dance comes on the backdrop of outgoing President Donald Trump’s second impeachment – a historic first. The House issued a rebuke to Trump for inciting an insurrection, following last week’s riots in the Capitol.

Despite support from ten Republicans, the Senate is unlikely to initiate a trial to oust the president before his term ends in six days. Investors are only concerned about potential violence around Biden’s inauguration.

While the focus is on the post-pandemic future, a snapshot of the current, grim present is also of interest. Weekly jobless claims are set to remain elevated near 800,000 as coronavirus continues raging in the US. The daily death toll refuses to drop below 4,000 and hospitals are under pressure.

The situation in Europe is even worse, with Germany recording a new mortality peak as it mulls extending its lockdown. The governments in the old continent are under pressure to ramp up their vaccination campaigns. Most countries in the old continent have administered the jabs to only roughly 1% of the population, compared to over 3% in the US.

The European Central Bank’s meeting minutes from the December decision are also due on Thursday. However, ECB President Christine Lagarde already spoke on Wednesday, providing an up-to-date take on the current affairs. Lagarde said that uncertainty is lower after Brexit, the US elections, and the vaccines. Her words failed to help the euro – and it is hard to see how the ECB minutes can boost it.

2) Dollar Extends Rebound As Investors Await US Stimulus Details

President Trump has been impeached by the House of Representatives. This is the first time that a president has been impeached twice. Since the Senate trial won’t happen until the inauguration, Trump would not be removed from office.

US core CPI rose 0.1% MoM in December compared to 0.2% in November. Lower than expected core CPI has caused the US 10y to yield to come off further from recent highs around 1.18%. Comments from Fed members that it is too soon to talk about the tapering of asset purchases have also stemmed from the selloff in US treasuries. The US Dollar has strengthened against Euro and Sterling which continue to get resisted at 1.2250 and 1.37 respectively. The US Dollar is weaker against commodity currencies and EM currencies. President-elect Biden is likely to present details of a USD 2tn Coronavirus relief package today. US yields have come up 3bps overnight.

The CPI-led uptick in domestic bonds was short-lived with the yield on the 10y benchmark bond ending at 5.94%. We expect the RBI to announce an OMO soon to manage sentiment in the bond market. The forward curve onshore continues to get more and more dislocated. Cash Dollar selling is keeping cash-spot points elevated at 4%. 1y forward is at 4.65%. A USD glut on account of persistent inflows and an uptick in money market rates has contributed to forward getting paid across the curve. However if the RBI uses other instruments to suck out liquidity such as Term Reverse Repos or CMBs, it would not have to sterilize its FX intervention. This should eventually cause the forward curve to normalize. An elevated forward curve makes shorting the Rupee against the Dollar expensive.

3) GBP/USD: Third Time’s a Charm? Why a New Attack on 1.37 Might Succeed

Is the severe British lockdown bearing fruits? That could serve as a tiebreaker for GBP/USD, which has tackled 1.37 twice and may pierce higher.

Coronavirus cases have been dropping from the peak, providing hope that deaths – which have hit record highs – will decline as well. The decline in infections would also alleviate pressure on overstrained hospitals and calls by the opposition for even tighter restrictions.

So far, cable has been pushed and pulled by two opposing forces. Starting from positive UK developments, the vaccination campaign continues at full speed, hitting 4.52% of the population – the highest in the Western world. Moreover, Britain begins administering jabs in pharmacies on Thursday, potentially accelerating the pace.

Investors are looking beyond the current misery and to the future. The faster a country inoculates its population, the quicker the economic recovery.

Focusing beyond the current hardship is also the name of the game in the US. According to reports, President-elect Joe Biden is set to present a large $2 trillion relief package – more than expected. The news has been pushing investors to stocks and away from bonds – resulting in higher yields. In turn, elevated returns on American debt boost the greenback.

The ball is now in the Federal Reserve’s court. Will it buy additional bonds, pushing yields and the dollar lower? Jerome Powell, Chairman of the Federal Reserve, speaks later in the day and he may opt for taking the other direction – gradually tapering down the bank’s support, as the economy needs less of it. His colleagues at the Fed have been mostly rejecting the option of purchasing fewer bonds – but the focus on optimistic forecasts is supporting the dollar.

Back to the grim present, investors will watch updated UK covid statistics and also US jobless claims, which are set to remain at the highs around 800,000.

Pound/dollar continues trading in a broad upward channel. Zooming in, momentum on the four-hour chart remains to the upside, and the currency pair trades above the 50, 100, and 200 Simple Moving Averages – all bullish signs. Moreover, the slide earlier in the week pushed the Relative Strength Index away from 70, further away from overbought conditions.

Soft resistance awaits at 1.3670, which was a swing high last week. Critical resistance is at 1.3705 – the multi-year peak attacked twice in 2021. Further above, 1.3730 and 1.3830 await cable.

Cable has support at 1.3615, the daily low. It is followed by 1.3545, a cushion from last week, followed by 1.3450.