For the past few weeks anti USD news flow has been keeping investors’ interest live in other currencies. The sell-off in USD drove EUR, GBP and other currencies to multi-year highs. On Monday, USD witnessed erosion in value against most of the currencies; investors started taking new, but short positions in greenback.
There’s very little on the US calendar this week with the exception of inflation data. Prices are expected to rise; due to the higher cost of fuel, but inflation in the US is very low, likely to have hardly any impact on the US Fed policy.
With that said, investors could find a stronger number a good excuse for USD short covering. Instead, investors may have eyes on stocks. The Dow Jones Industrial Average pulled back after climbing to record highs last week, but the NASDAQ extended its gains. If stocks suffer a deeper correction, the greenback could catch a safe haven bid.
This week, the focus will remain on developments in Europe. UK Prime Minister and European Commission President held the highest levels of Brexit talks on Monday, but no agreement was reached, in fact no progress was made in the last 2 days.
GBP sold off was conspicuous in response but rebounded from its lows as investors hope that a physical meeting between the two over the next few days could yield positive results. The UK government also offered to withdraw parts of its internal market bill that counteracts the Withdrawal agreement if a trade deal is reached this week.
This olive branch gave Brexit deal optimists hope. Yet, both sides have been stubbornly unwavering on 3 key issues – fishing rights, enforcement of governance of the agreement and a level playing field. Therefore, it remains unclear if a deal is really within reach. Regardless of any outcome, analysts expect high volatility in GBP this week.
EUR will also be a big mover with the European Central Bank gearing up to ease monetary policy. While stronger than expected German data keeps EUR/USD near 2.5 year highs, investors may indulge in profit taking ahead of the monetary policy announcement.
The ECB made its intentions very clear, giving investors plenty of time to discount their move. A vaccine is here but dissemination won’t be quick enough to avoid more deaths.
Germany responded by closing retail shops for a few weeks after Christmas. Countries like Denmark are reinstating partial lockdown measures which confirm that the pandemic continues to take a toll on the region’s economy. The ECB is expected to ease, but it may also leave the door wide open for additional measures.
Australian and New Zealand currencies extended their gains on the back of stronger manufacturing data from Australia and trade data from China. Of all the major currencies, AUD seems the most vulnerable to a correction. Data has been good and they’ve beaten a second COVID-19 wave but tensions with China continue to grow.
China suspended imports of more Australian beef. This follows as much as 200% tariffs on Australian wine, blocked imports of Australian lobsters and delays on coal imports. These are some of Australia’s most important exports to China.
The Canadian currency also lost ground on the back of softer manufacturing growth. Economists had been looking for an improvement. The most worrisome part of the report was the employment component which fell – suggesting that job growth in December will be much weaker.