Fundamental Analysis – Market Review 01 Feb 2021
EUR is trading flat against USD during today’s Asian session, waiting for new drivers to appear on the market. At the end of the last trading week, the instrument’s dynamics was characterized by moderate growth of EUR in response to the publication of moderately optimistic macroeconomic statistics from Germany. The Unemployment Rate in the country remained at 6% in December, while investors expected it to rise slightly to 6.1%. Unemployment Change for the same period decreased by 41K after falling by 40K in the previous month. Analysts predicted an increase by 3K. German GDP in Q4 2020 maintained a slight growth of 0.1% QoQ after jumping by 8.5% QoQ in the previous period. In annual terms, the decline in GDP slowed down from the previous –3.9% YoY to –2.9% YoY, which turned out to be better than market expectations at the level of –3.4% YoY.
GBP is strengthening against USD during this morning trading session, again attempting to recover to previous record highs. Investors are taking advantage of some confusion in the markets, but GBP does not have many fundamental reasons for reaching new highs. The epidemiological situation in the country remains difficult, and at the moment the authorities are forced to maintain extremely unpopular restrictive measures, hoping that an active vaccination campaign will be able to reduce the existing risks. Today, investors are focused on statistics from the UK on business activity in the manufacturing sector for January. In addition, traders will pay attention to December statistics on Consumer Credit and Mortgage Approvals.
NZD has shown strong gains against USD during today’s Asian trading session, recovering from ambiguous performance at the end of last week. The instrument adds about 0.18% and is testing the level of 0.7200 for a breakout. The pair is supported by expectations of new measures to stimulate the American economy, which provide for a sharp increase in budget spending. In addition, investors are interested in finding alternatives to USD, which, for example, is clearly indicated by the growth chart of the Bitcoin cryptocurrency. Meanwhile, the published macroeconomic statistics did not provide significant support to the instrument. Investors were noticeably disappointed by the latest statistics on business activity from China. Non-Manufacturing PMI fell from 55.7 to 52.4 points in January, which was worse than the expected 52.6 points. NBS manufacturing PMI for the same period corrected from 51.9 to 51.3 points against the forecast of 51.6 points. Caixin Manufacturing PMI fell from 53 to 51.5 points in January, while analysts had expected a decline to only 52.7 points.
USD is correcting against JPY during today’s morning session, retreating from local highs since November 16, which the instrument managed to update at the end of the last trading week. The reason for the strengthening of “bullish” sentiment was technical factors, while the fundamental background in the market changed little. Moreover, JPY gained support on Friday after the publication of relatively confident macroeconomic statistics on the Japanese labor market, which showed greater resilience than experts expected. In turn, data from the US also turned out to be better than market forecasts. Personal Income in December 2020 increased by 0.6% MoM after declining by 1.7% MoM in the previous month. Experts expected an increase of 0.1% MoM. The rate of decline in Personal Spending in December slowed down from –0.7% MoM to –0.2% MoM, which turned out to be two times better than the forecasts. The Chicago PMI in January rose sharply from 58.7 to 63.8 points against the forecast of a decline to 58.5 points.
Gold prices are relatively stable during today’s Asian session, consolidating near 1860.00. At the end of last week, gold made another attempt to grow, but the instrument still failed to consolidate at new local highs, and by the time the afternoon session closed, the “bulls” had almost completely lost initiative. This week, investors expect a broad discussion of the new package of measures to support the US economy from Joe Biden in the US Senate and House of Representatives. The “American Rescue Plan”, as it has already been dubbed in the media, is expected to be widely criticized by Republicans, who have repeatedly stated that it is too expensive.
What’s stopping dollar? Forecast as of 01 Feb 2021
A faster vaccination in the USA than in the euro-area supports the greenback. However, something is stopping the dollar rally. What exactly? Let us discuss the Forex outlook and make up a EURUSD trading plan.
Monthly US dollar fundamental forecast
The US policymakers in Congress, who approve fiscal stimulus plans, and investors, who are buying out stocks, have different goals (the government wants to support the US economy, traders want to make money); however, they have something in common. Low interest rates. On the one hand, they help reduce debt-servicing costs; on the other hand, low rates mean that the US securities market bubble is still unlikely. The fundamental estimates of stock indexes are not overvalued; the US stocks and risk appetite have room to grow, which hinders the US dollar.
Most previous recessions in the US happened because the Fed took away the punch bowl in the middle of the party. The central bank hiked the interest rates, which drew up the Treasury yields, which resulted in the S&P 500 overvaluing, ending up in deep corrections. 2020 was an exclusion, and the Treasury rates didn’t grow. The current economic downturn results from the pandemic.
Of course, the stock index could collapse again if, for example, vaccines do not help defeat COVID-19, but as long as the US stock market is bullish, the EURUSD correction shouldn’t be deep. At the same time, the slightest signs of an improvement in the situation in the eurozone economy will send the euro up. A typical example was the euro-dollar rise amid the unexpected expansion of the GDP of Germany and Spain in the fourth quarter. If the euro-area economy has adjusted to the pandemic, isn’t it time to buy the euro?
Hedge funds stick to the idea that the EURUSD uptrend should recover as vaccines are introduced and the COVID-19 is being defeated, which evident from the fact that USD speculative long positions are around multi-year lows. Goldman Sachs says the vaccine company’s problems did not affect his views. The bank remains confident that the overestimated greenback, low nominal and real rates in the United States, and the global economy’s recovery will support the EURUSD rally.
I would also like to believe that a positive scenario based on a victory over the pandemic will come true, and the euro will reach $ 1.25 in the first half of 2021. However, according to UBS research, at the current rate of vaccination, only 10% of the world’s population will be inoculated by the end of 2021. By the end of 2022, this figure will increase to 21%. The global economic recovery could be uneven. Therefore, the greenback could benefit from faster GDP growth in the US than in other countries.
Monthly EURUSD trading plan
Time will show the efficiency of suggested trading scenarios. In the meanwhile, level 1.208 is a significant level for the EURUSD. If the price breaks out level1.208 downside, it could continue falling to 1.204, 1.199 and 1.195, where, due to the limited potential for correction, the traders are likely to buy out the pair. If the bulls drive the price above 1.218 and 1.221, the medium-term consolidation scenario in the range of 1.208-1.238 I described in early January will become the main scenario.