28-Dec-2020

1) Dollar Dithers In Thin Trade As Trump Passes Aid Package
2) EUR/USD Approaching Next Major Break, 1.2150 Holds The Key
3) GBP/USD: Brexit Deal Announcement, US Stimulus Remained Supportive

1) Dollar Dithers In Thin Trade As Trump Passes Aid Package

The two themes that had been dominating the global macroeconomic landscape over the past many weeks were the US fiscal stimulus and EU-UK trade negotiations. There was a breakthrough on both the themes last week. The US Congress passed the USD 900bn stimulus package and the EU and the UK managed to reach a trade agreement.

As far as the EU-UK trade agreement is concerned, The devil would lie in the details. While an EU-UK trade agreement would avoid disruptions and ensure continuity for businesses over the short term, there are questions over how the enforcement of the deal would be ensured over the long run and how disputes would be resolved. Even with the deal, output in the UK is likely to be 4% lower than potential according to estimates.

President Trump just signed the bill yesterday. His refusal to sign the stimulus bill passed by Congress would delay benefits reaching those who need them the most. However, the government shutdown has been averted. Without the bill being passed, funding would have dried out for several federal agencies. This could have had a seriously debilitating effect on an economy where recovery is plateauing. The Georgia State Senate runoff elections assume even more significance now. Democrats are going to vote on expanding the cash transfers to USD 2000 from USD 600, however, this may find resistance in the Republican controlled Senate. If Democrats manage to win both the seats in the Georgia runoff, they would end up having to have control over the presidency, the Senate, and the House. This would make doling out further stimulus a lot easier. Democrats winning the runoffs could result in the next leg of USD weakness. If Republicans manage to retain control over the Senate, we could see the Dollar see a relief rally.

PBoC has injected a lot of liquidity into the banking system. Chinese bond yields have moved lower. Onshore too bonds are likely to rally as the RBI announced a Rs 10000crs OMO twist on Friday. The government did not accept any bids in the 10y bond and instead borrowed more at the shorter end i.e. 2y and 5y and longer end. This caused the 10y bonds to rally post the cutoff on Friday. The OMO twist was announced post the cutoff.

The price action in Rupee is likely to be largely flow driven in the coming week. There are likely to be few Global cues over the coming week on account of the Christmas holidays. 73.40 is an extremely crucial support for USDINR. Participation is likely to remain muted and liquidity could be thin. We expect the RBI to continue buying Dollars in 73.40-73.50. Liquidity could dry up on a Break of 73.40, leading to exaggerated moves. The December currency derivative expiry on Friday will be interesting given the high open interest due to RBI intervention. We expect the Rupee to trade in a 73.40-73.70 range intraday. Asian currencies are stronger against the USD. SGX is indicating a 100pt gain for Nifty on open.

2) EUR/USD Approaching Next Major Break, 1.2150 Holds The Key

Looking at the 4-hours chart, the pair traded as low as 1.2152 and remained well bid above the 100 simple moving average (red, 4-hours). There was a recovery wave from 1.2152 and the pair climbed above 1.2200.

However, the pair failed to clear the 50% Fib retracement level of the downward move from the 1.2256 high to 1.2152 low. Moreover, there is a crucial contracting triangle forming with resistance near 1.2205 on the same chart.

A clear break above the triangle resistance and 1.2220 could open the doors for a fresh increase. The next major resistance on the upside is near 1.2260, followed by 1.2280.

If there is a downside break below the triangle support, there is a risk of a breakdown below the 1.2150 support and the 100 SMA. In the stated case, the pair could grind lower towards the 1.2120 and 1.2100 support levels.

3) GBP/USD: Brexit Deal Announcement, US Stimulus Remained Supportive

The GBP/USD pair gained some strong positive traction on Friday and moved back above the 1.3600 mark, albeit failed ahead of multi-year tops touched earlier this December. The British pound saw a “sell the fact” reaction to the announcement that the United Kingdom reached a last-minute Brexit deal with the European Union. Given that the outcome was largely priced in the market, the lack of surprise did little to provide any meaningful impetus amid relatively thin liquidity conditions on Christmas Eve.

Both the UK and the EU will now have to ratify the deal. British Prime Minister Boris Johnson said that the UK Parliament will vote on the trade deal by December 30, a day before the end of the Brexit transition period. The European Parliament, however, has declined to vote on the accord this year due to the lack of time for scrutiny. The European Commission, instead, has proposed to provisionally apply the deal until February 28, 2021, as the EU nation members are scheduled to meet in January.

Nevertheless, the pair settled around 80 pips off daily swing highs, though the prevalent US dollar selling bias assisted the pair to regain some positive traction for the third consecutive session on Monday. Apart from the latest Brexit optimism, news that the US President Trump has signed a $2.3 trillion COVID-19 relief and government funding bill boosted investors’ confidence. This, in turn, was seen as a key factor that continued undermining the greenback’s relative safe-haven demand.

The pair held steady above mid-1.3500s during the Asian session and is unlikely to make any big moves in either direction amid holiday-thinned trading. The UK banks will be closed in observance of Boxing Day. That said, developments surrounding the coronavirus saga might infuse some volatility and assist traders to grab some short-term opportunities.

From a technical perspective, bulls might now wait for a sustained move beyond the recent swing highs, around the 1.3620-25 region, before positioning for an extension of the recent upward trajectory. The momentum might then push the pair further towards the 1.3700 round-figure mark for the first time since May 2018. Any subsequent move up is more likely to confront a stiff resistance and pause near the 1.3740 horizontal resistance.

On the flip side, the key 1.3500 psychological mark might now protect the immediate downside and is closely followed by the 1.3480-75 horizontal support. Dips below the mentioned support levels might now be seen as a buying opportunity and remain limited near the 1.3435 region. However, some follow-through selling might prompt some long-unwinding and turn the pair vulnerable to slide back below the 1.3400 round-figure mark.