USD likely to witness fresh losses this week

It has been a challenging week for the USD. The greenback fell to fresh 2.5 year lows against most of the major currencies, but as the week drew to a close, it finally rebounded. While some hope, this mark a bottom for USD, there’s scope for further losses during the week starting Monday. Vaccine progress and the prospect of a stimulus deal are some of the main reasons for the greenback’s weakness and that is not expected to change. Stimulus talks are progressing and there’s talk that an agreement may be reached over the weekend.

While USD falls significantly short of the support offered in March, it would provide millions of Americans with much needed relief. Moderna is on track to have their vaccine approved by the Food and Drug Administration, making it the second vaccine available to the Americans – this could happen as early as Monday. The rally in equities this week could be renewed by the combination of positive stimulus and vaccine news. If that happens, the greenback could see fresh losses.

No US economic reports were released on Friday but outside of housing, US data has mostly surprised to the downside. This week revisions to Q3 GDP, personal income, personal spending, existing and new home sales are due for release.  Housing data should hold steady but income and spending should be softer. With that said, the primary driver of USD flows will be year-end position adjustments, stimulus and vaccine news. Short covering after a strong move this year is one of the few reasons why the USD could extend its recovery in the coming days.

EUR snapped a four day rise despite another piece of better than expected data. The German IFO business climate index rose with improvements in both the current conditions and expectation components. Throughout this month we’ve seen consistent upside surprises in Eurozone data that justifies the currency’s rally. Thus far, the impact of nationwide lockdown has been limited. While there’s still risk of weak data in December, economists underestimate the region’s resilience.  With no major Eurozone economic reports scheduled for release this week, the market’s appetite for USD will be the primary driver of EUR/USD.

The pullback in GBP on Friday was more significant as Brexit headlines grew further negative. Talks continue, but with less than two weeks before Britain is scheduled to leave the European Union, they are no closer to a deal.

On Friday the European Commission admitted that it was unknown if or when there will be a deal and that seems to be the view shared by UK officials. Fishing rights is still the main obstacle. It is a fraction of UK GDP (0.15%) but a highly emotional issue because Britons believe that British fishing grounds are “first and foremost” for British ships but the EU also wants access for its boats.

Quotas are set on the volume of fish that can be caught each year and the UK wants to control who can fish in its waters. The EU is under significant pressure to maintain current quotas because of the plentifulness of UK seas. It is such a big point of contention that the Brexit deal could live or die on fish. Stronger UK retail sales may be the only reason GBP did not see a bigger decline on Friday.

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