16-Dec-2020

1) Dollar On The Defensive Before The FOMC Policy
2) GBP/USD: Set-Up Favours Bulls Amid Brexit Deal Speculation
3) EUR/USD: Confined In A Range Below YTD Tops; Eurozone Pmis, FOMC In Focus

1) Dollar On The Defensive Before The FOMC Policy

There is a possibility that the Democrats and Republicans may agree on a slimmed-down version of the stimulus bill ($748bn). Given the urgency and criticality of the stimulus package, a bare-bones deal would at least help ensure that the economic recovery does not stall.

Despite stricter restrictions and the possibility of New York going into lockdown, the positive development around the stimulus bill is keeping the risk sentiment supported.

The US Dollar is weaker, the US yield curve is steeper, equities, commodities and commodity-linked currencies have gained. There is also speculation that the EU and the UK are close to reaching an agreement on trade. It is likely to be a bare-bones deal, lacking specifics and leaving contentious issues unaddressed; intended to avoid panic setting in among businesses and markets and to prevent colossal disruptions that could ensue in the event of a no-deal.

The domestic November trade deficit came in at a 9 month high at $9.9bn compared to the October print of $8.7bn.

A higher trade deficit indicates a recovery in domestic consumption. We expect the Rupee to trade in a 73.25-73.60 range. A break of 73.40 could trigger stops and thin liquidity could exacerbate the move. FOMC policy is due today and the committee is likely to continue remaining ultra-accommodative.

2) GBP/USD: Set-Up Favours Bulls Amid Brexit Deal Speculation

The GBP/USD pair attracted some dip-buying on Tuesday and rallied around 190 pips from daily swing lows, around the 1.3280 region. The British pound strengthened across the board on reports that the United Kingdom is heading towards a Brexit deal. The optimism helped offset earlier comments by the UK PM spokesman, saying that Britain wants a post-Brexit deal but not at any cost. The PM Johnson told his senior ministers that a no-deal Brexit is still the most likely outcome, the spokesman added further.

Apart from positive Brexit developments, the prevalent bearish sentiment surrounding the US dollar provided an additional boost to the major. In fact, the key USD Index dropped to fresh two-and-half-year lows amid the growing prospects for more US fiscal stimulus. This comes on the back of positive COVID-19 vaccine news, which remained supportive of the upbeat market mood and continued weighing on the greenback’s safe-haven status. Tuesday’s mixed US macro data also did little to provide any respite to the USD bulls.

The combination of factors pushed the pair back above mid-1.3400s, which sums up to over 330 pips of a strong rally from one-month lows touched last Friday. The pair now seems to have entered a bullish consolidation phase and was seen oscillating in a narrow trading band through the Asian session on Wednesday. Market participants now look forward to the UK economic docket, highlighting the release of the latest consumer inflation figures and flash PMI prints for December. Later during the early North American session, the US monthly Retail Sales figures will also be looked upon for some short-term trading opportunities.

That said, the incoming Brexit-related headlines will continue to play a dominant role in influencing the sentiment surrounding the sterling and infuse some volatility. Apart from this, Wednesday’s key focus will be on the latest FOMC monetary policy update. The Fed is scheduled to announce its policy decision later this Wednesday and is widely expected to keep the key overnight interest rate pinned near zero.

Meanwhile, the markets have been expecting that the US central bank will increase its bond-buying program. Hence, the key focus will be on the accompanying monetary policy statement and updated economic projections. This will be followed by the post-meeting press conference, where comments by the Fed Chair Jerome Powell will be looked upon for clues about the central bank’s policy outlook and help determine the next leg of a directional move for the greenback.

From a technical perspective, the overnight strong momentum might have already set the stage for a further appreciating move towards the key 1.3500 psychological mark. Any further move up is more likely to confront a stiff resistance near the top boundary of a short-term ascending channel. The mentioned barrier is currently pegged near-monthly swing highs, around the 1.3530-40 region, which if cleared decisively should pave the way for an extension of the bullish trajectory.

On the flip side, the 1.3400 round-figure mark now seems to protect the immediate downside. Any meaningful pullback below the mentioned level might still be seen as a buying opportunity near the 1.3350-45 region. This, in turn, should help limit the downside near the 1.3320-15 zone. However, some follow-through selling, leading to a convincing breakthrough the 1.3300-1.3280 region, will negate any near-term positive bias. The pair might then turn vulnerable to accelerate the slide further towards testing important confluence support near the 1.3200 mark – comprising of 50-day SMA and the lower end of the mentioned trend-channel.

3) EUR/USD: Confined In A Range Below YTD Tops; Eurozone Pmis, FOMC In Focus

The EUR/USD pair continued with its subdued/range-bound price action on Tuesday and remained confined in a familiar trading band around mid-1.2100s. The global risk sentiment remained well supported by the rollout of vaccines for the highly contagious coronavirus disease and hopes for a last-minute Brexit deal. This, along with the growing prospect of more US fiscal stimulus, dragged the US dollar to fresh two-and-half-year lows and was seen as one of the key factors that continued lending some support to the major.

The USD remained depressed and failed to gain any respite from Tuesday’s mixed US economic releases. In fact, the Empire State Manufacturing Index missed market expectations and fell two points to 4.90 in December. The disappointment, to a larger extent, was offset by slightly better-than-anticipated Industrial Production data, which recorded a growth of 0.4% MoM in November. The data did little to provide any meaningful impetus as investors seemed reluctant ahead of the two-day FOMC meeting that got underway on Tuesday.

The Fed is scheduled to announce its policy decision later this Wednesday and is widely expected to keep the key overnight interest rate pinned near zero. That said, the markets have been expecting that the US central bank will increase its bond-buying program. Hence, the key focus will be on the accompanying monetary policy statement and updated economic projections – the so-called dot-plot. Apart from this, the Fed Chair Jerome Powell’s comments at the post-meeting press conference will be looked upon for clues about the central bank’s policy outlook. This, in turn, would influence the near-term USD trajectory.

Heading into the key event risk, traders are likely to take cues from Wednesday’s release of the flash Eurozone PMI prints for December. The US economic docket highlights the release of monthly Retail Sales, which might further assist traders to grab some meaningful opportunities, though is unlikely to be a game-changer for the pair.

From a technical perspective, nothing seems to have changed much for the pair and the near-term bias remains tilted firmly in favor of bullish traders. That said, bulls might still need to wait for some follow-through buying beyond the 1.2175-80 area before placing fresh bets. Above the mentioned region, the pair might seems all set to surpass the 1.2200 mark and aim towards testing the 1.2235-40 resistance zone. The momentum could further get extended and has the potential to push the pair further towards the 1.2300 mark en-route March 2018 monthly closing highs resistance, around the 1.2315 region.

On the flip side, any meaningful pullback might continue to find decent support near the 1.2100 mark. A subsequent fall might still be seen as a buying opportunity, which should help limit the downside near the 1.2075 region. Failure to defend the mentioned support levels might prompt some technical selling and turn the pair vulnerable to accelerate the fall further towards challenging the key 1.2000 psychological mark.