17-Dec-2020

1) Dollar Remains On The Defensive After A Short-Lived Rebound Following Fed’s Unchanged Rate Decision
2) EUR/USD: Bulls Remain In Control, Fresh Two-And-Half-Year Tops and Counting
3) GBP/USD: Continues To Rising On Brexit Optimism, BoE Eyed For Fresh Impetus

1) Dollar Remains On The Defensive After A Short-Lived Rebound Following Fed’s Unchanged Rate Decision

The greenback pared its losses in New York on profit-taking after falling to multi-year lows against its peers on Wednesday on optimism that lawmakers in the U.S. are nearing an agreement on the Covid-19 relief package. Although the dollar briefly spiked higher after the Fed kept its key rate unchanged, the greenback erased intra-day gain and retreated broadly near the close.

Reuters reported the Federal Reserve on Wednesday vowed to keep funneling cash into financial markets until the U.S. economic recovery is secure, a promise of long-term help that fell short of hopes of an immediate move to shore up a recent pandemic-related slide.

Following a policy meeting that took stock of both the short-term risks to the economy and the new promise of a coronavirus vaccine, Fed Chair Jerome Powell acknowledged the U.S. central bank’s suite of tools is not well-suited to the most pressing needs faced by households and businesses today.

“The parts of the economy that are weak are the service-sector businesses that involve close contact,” such as restaurants and the travel industry, Powell said in a news conference following the two-day meeting. “Those are not being held back by financial conditions, but rather by the spread of the virus” that is now intensifying across the country, he said.

Reuters revealed that U.S. congressional negotiators on Wednesday were “closing in on” a USD 900 billion COVID-19 aid bill that will include a new round of stimulus checks and extended unemployment benefits, lawmakers and congressional aides said. One source familiar with the talks said the deal also focused on providing aid to state and local governments. But it was not clear what form such aid would take, since Republicans have resisted another round of direct payments to those entities. “Other avenues” were being discussed to deliver such aid, the source said, without providing details. The aid bill is not expected to include new protections for companies and universities from lawsuits related to the pandemic, the source said.

Versus the Japanese yen, the dollar continued its losing streak and fell from 103.72 to 103.42 in Asia before recovering to 103.60 but only to fall again to a fresh 5-week low at 103.27 in Europe on USD’s weakness. The pair later rebounded to 103.64+on short-covering together with rising U.S. Treasury yields. Although the price briefly spiked to session highs of 103.91 in post-FOMC New York, the pair quickly retreated and traded at 103.48 near the close.

Although the single currency moved sideways in Asia, price found renewed buying at 1.2153 in early European trading and jumped to +a fresh 2-1/2 year high of 1.2211+ due to upbeat eurozone PMI data before retreating in New York morning on profit-taking as well as cross-selling in euro, especially versus sterling. Euro briefly spiked down to 1.2126 in post-FOMC New York but only to quickly rebound to 1.2202 near the close.

Reuters reported the PMI covering the bloc’s dominant service industry bounced to 47.3 from 41.7, exceeding all expectations in the Reuters poll that had instead predicted a modest increase to 41.9. Factories have been less affected by lockdown measures as many remained open and the flash manufacturing PMI jumped to 55.5 from 53.8, its highest since May 2018 and also above all expectations in a Reuters poll that had a median prediction for 53.0.

The British pound continued its recent ascent on market optimism the European Union and the United Kingdom will reach a last-minute Brexit deal before the December 31st deadline. Cable found renewed buying at 1.3435 in Asian morning and rose to 1.3519 in European morning before retreating sharply to 1.3474. However, the pair then rallied to a fresh 2-1/2 year peak of 1.3555 (Reuters) at New York open before retreating sharply to 1.3451 in post-FOMC New York on profit-taking.

Reuters reported British consumer prices rose 0.3% in annual terms, after a 0.7% rise in October. A Reuters poll of economists had pointed to a reading of 0.6%. And the EU’s chief executive said on Wednesday that she could not say if there would be a trade accord with Britain but there had been progress and that the next few days would be critical. “As things stand, I cannot tell you whether there will be a deal or not. But I can tell you that there is a path to an agreement now. The path may be very narrow but it is there,” European Commission President Ursula von der Leyen said.

In other news, Reuters reported Britain and the European Union can see a landing zone for an agreement on the so-called level playing field provisions in a Brexit trade deal, but both sides are struggling to compromise on fishing, Ireland’s state broadcaster RTE said on Wednesday. “While both sides have a way to go, on the level playing field/state aid there is a landing zone in sight. On fisheries, both sides say that is ‘very difficult’,” RTE reporter Tony Connelly said on Twitter. “It looks as if all the energy is going into the LPF (level playing field) and once cracked, they’ll barrel into the fisheries stuff. Governance, or how to solve disputes, looks like it has been more or less done.”

2) EUR/USD: Bulls Remain In Control, Fresh Two-And-Half-Year Tops and Counting

A combination of supporting factors pushed the EUR/USD pair beyond the 1.2200 mark for the first time since 2018. The shared currency got a strong lift on Wednesday after a report showed that the manufacturing sector activity expanded faster than estimated and the services sector contracted less than anticipated. The data added to the optimism that the region’s economy is beginning to stabilize and that the recovery is gaining traction. The momentum was further supported by a broad-based US dollar weakness amid the prevalent upbeat market mood.

The global risk sentiment remained well supported by the recent positive news about the rollout of vaccines for the highly contagious coronavirus disease, hopes for a Brexit deal, and prospects for additional US stimulus. Republicans and Democrats in the US Congress were reportedly on the brink of an agreement on a $908 billion COVID-19 relief package ahead of Friday’s looming deadline. The greenback failed to gain any respite and remained depressed following the disappointing release of the US monthly Retail Sales figures for November.

The bearish pressure surrounding the USD remained unabated after the Fed said that it will continue to support the economy through massive monetary stimulus. At the final meeting of the year, the US central bank vowed to keep pouring cash into the financial markets until the US economic recovery is secure. The clear message that the Fed is willing to do more if needed did little to lend any support to the greenback or stall the ongoing downfall. This, in turn, allowed the pair to continue scaling higher through the Asian session on Thursday.

The pair shot to fresh two-and-half-year tops as market participants now look forward to the release of the final Eurozone CPI print for a fresh impetus. The US economic docket highlights the releases of the Philly Fed Manufacturing Index, Initial Weekly Jobless Claims, and housing market data – Building Permits and Housing Starts. The data, however, is unlikely to be a major game-changer for the USD and hence, the path of least resistance for the pair remains to the upside.

From a technical perspective, the overnight breakthrough of the 1.2175-80 horizontal resistance was seen as a fresh trigger for bullish traders. That said, technical indicators on the daily chart are already flashing overbought conditions and warrant some near-term consolidation or a modest pullback before the next leg up. Nevertheless, the pair still seems poised to prolong its bullish trajectory and aim to reclaim the 1.2300 round-figure mark. Some follow-through buying should pave the way for additional gains, though the momentum could pause near the 1.2340-50 region.

On the flip side, the 1.2200 round-figure mark now seems to protect the immediate downside and is closely followed by the 1.2180-75 resistance breakpoint. Failure to defend the mentioned support levels might prompt some technical selling. However, any subsequent fall might still be seen as a buying opportunity near the 1.2130 region, which marks 200-hour SMA and should now act as a strong near-term base for the major.

3) GBP/USD: Continues To Rising On Brexit Optimism, BoE Eyed For Fresh Impetus

The GBP/USD pair added to this week’s strong gains and surged past the key 1.3500 psychological mark amid optimism over the possibility of a last-minute Brexit trade deal. The European Commission President Ursula von der Leyen said on Wednesday that she saw clear progress in the trade talks with the UK and there is now a path to a Brexit agreement Von der Leyen further added that sometimes it feels like they may not reach a solution on fisheries. Separately, an EU official reportedly said that fisheries remained the main problem in trade talks and that the EU has rejected Britain’s offer of phased access to UK waters for the next three years. The comments, however, implied that negotiators have moved forward on the other two sticking points of the level playing field and also governance. This, in turn, was seen as one of the key factors that provided a goodish lift to the sterling.

Apart from the hopes for a post-Brexit deal, a broad-based US dollar weakness provided an additional boost to the major and remained supportive of the strong bullish momentum. In fact, the USD Index tumbled to fresh two-and-half-year lows amid the prevalent upbeat market mood. The global risk sentiment remained well supported by the recent positive news about COVID-19 vaccine rollouts and prospects for additional US stimulus. In the latest development, Republicans and Democrats in the US Congress were reportedly on the brink of agreeing on a $908 billion coronavirus relief package ahead of Friday’s looming deadline. The USD remained depressed following the disappointing release of the US monthly Retail Sales figures for November and failed to gain any respite after the Fed said that it will continue to support the economy through massive monetary stimulus.

At the final meeting of the year, the US central bank vowed to keep pouring cash into the financial markets until the US economic recovery is secure. The clear message that the Fed is willing to do more if needed did little to provide any respite to the USD bulls. The bearish pressure surrounding the USD remained unabated through the Asian session on Thursday. This, in turn, pushed the pair to climb further beyond mid-1.3500s, or the highest level since May 2018. The market focus now shifts to the Bank of England (BoE) monetary policy meeting. The BoE decision is unlikely to be a non-event as the central bank is expected to maintain the status quo and opt to watch from the sidelines on how the EU-UK trade talks pan out. Hence, the key focus will remain on the incoming Brexit-related headlines, which should continue to play a dominant role in influencing the GBP price dynamics.

From a technical perspective, the pair is now looking to build on the momentum further beyond a near three-month-old ascending trend-channel resistance. With technical indicators still far from being in the overbought territory, the stage seem set for a move towards reclaiming the 1.3600 round-figure mark. This is followed by resistance near the 1.3635 region. Some follow-through buying should pave the way for an extension of the ongoing appreciating move

On the flip side, any meaningful pullback now seems to find immediate support near the 1.3500 round-figure mark. Failure to defend the mentioned level might prompt some technical selling and accelerate the slide towards the 1.3465-60 region. However, the pullback might still be seen as a buying opportunity. This, in turn, should help limit the downside near the 1.3400 mark, which should act as a strong near-term base for the major. A sustained break below will negate the positive outlook and turn the pair vulnerable to extend the corrective slide.