The last full trading week of 2020 will be a busy one. There are four central bank meetings, December PMIs, employment and consumer spending reports from many countries on the calendar. In fact, not even one major economy escapes the release of market moving data.
Keeping all these in mind, the main focus will still be on the USD. Investors continued to sell greenback on Monday, kicking off what could be the fourth straight week of losses. Low interest rates, reserve diversification and a global vaccine rollout are all reasons for the decline.
US equities consolidated but its record breaking moves this month reflects the shift into risk assets, which is consistent with USD losing its safe haven bid.
This week’s upcoming Federal Reserve meeting is another reason for the greenback’s decline. There is growing belief that after the central bank’s two day meeting, they could increase asset purchases and lengthen the maturity of bonds they are willing to buy. The Fed may also shift to an outcomes based guidance that would tie tightening to specific goals.
Aside from these changes, Fed Chairman Powell’s tone along with adjustments to their economic projections will also be affected. Changes in interest rates are not expected. For the central bank, the impact of vaccine rollout will be weighed against joblessness and we would not be surprised to see a tinge of optimism from Powell even as jobless claims are rising.
The USD is oversold and it won’t take much for short covering. Greenback could see a lift from retail sales, which is also due for release a few hours before FOMC. Economists are looking for spending to fall but with wages rising and online spending hitting a record, the risk is to the upside. Last but certainly not least, everyone will also be watching stimulus talks.
The market’s appetite for USD will determine how many currencies trade but there’s enough global data for divergences to cause big moves for currency crosses. In addition to the US, the UK, Japan and Switzerland also have monetary policy announcements. Bank of Japan and Swiss National Bank meetings are typically not very market moving, but the Bank of England’s outlook could have a significant impact on how GBP trades. Thanks to the pledge by UK and EU officials to keep talks going beyond their prior deadline, GBP was the strongest currency on Monday. There’s still nothing definitive and the headlines could turn negative at any point, BoE will remain dovish. PMIs, Inflation, employment and retail sales figures are also due from the UK making it an exceptionally busy week for GBP.
EUR resumed its rise, coming within a pip of 2.5 year highs versus USD. Broad based USD weakness and stronger Eurozone industrial production numbers helped fuel the pair’s gains. Eurozone PMIs and the German IFO report are scheduled for release later this week. Recent lockdowns should drive PMIs lower but the expectations component of IFO could rise on vaccine optimism. Even if it does, the German government’s decision to go into nationwide lockdown until 10th January 2021 is a big problem for their economy and in turn the common currency. They previously considered shutting down shops after the Christmas holiday but the number of cases and deaths deteriorated to the point where they felt that a sweeping lockdown was needed immediately. Italy could follow as the number of deaths exceeded the UK.
For the commodity currencies, the most important releases will be Australian employment, New Zealand third quarter GDP and Canada’s inflation report. All three extended their gains against the greenback on Monday and we are looking for improvements all around. By reopening the state of Victoria, Australia stands to see further employment gains. The third quarter was strong for many countries and New Zealand is no exception. Inflation in Canada should also be stronger given the sharp increase in the price component of IVEY PMI.