Fundamental Analysis Report 08 Jan 2021
Dollar is clutching at straws. Forecast as of 08.01.2021
Although the US stock market rose, the euro rolled down. Will the correction be deep? Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly US dollar fundamental forecast
The Fed’s hawkish stance and the surge of the Treasury yield made EURUSD bulls nervous. Speculators have been building up US dollar shorts for the 40th week in a row, and the bullish factors for the greenback encourage the sellers to exit trades. Furthermore, Bloomberg experts expect a weak growth of the US nonfarm payrolls by 50,000. A quarter of the analysts polled suggest the indicator should enter a negative area.
35 out of 63 economists, which about 55%, predict the dollar downtrend should continue for more than a year. The median forecast for the EURUSD is 1.25 at the end of 2021.
The greenback is supported by the Treasury yield growth, which resulted from the growing chance of an extra fiscal stimulus provided by Joe Biden’s administration. The stimulus will increase the volume of bonds issue and lead to the capital outflow from the secondary market to the initial one. The US dollar grew amid the hawkish tone of the Fed’s officials. Richmond Fed President Thomas Barkin says the Treasury yield increase indicates that investors expect the Fed to hike the interest rates. Philadelphia Fed President Patrick Harker says the Fed may begin paring bond purchases in late 2021.
I don’t think the EURUSD bears should expect the US bond market rates to continue the rally. History hasn’t proven that an increase in bond issue volumes leads to a rise in yields. In contrast, the US debt to GDP ratio has hit the level that was last since during the Second World War, and rates are at near-record lows. The US government and the Fed remember very well that the debt must be paid, and the lower the yield, the cheaper it will cost to service them.
A ‘blue wave’ allowed the S&P 500 to hit new all-time highs and supported the Treasury yield growth. The rates on 10-year Treasuries have reached 1.1% for the first time since February, have featured the best four-day rally since the presidential election. The yield is growing too fast. On the one hand, it makes the US assets more appealing; on the other hand, it sets back carry traders and emerging markets’ currencies. According to Reuters experts, the EM currencies should rally in 2021. 47 out of 57 analysts expect the EM currencies to perform better than the advanced economies’ currencies.
Weekly EURUSD trading plan
Therefore, I do not think that EURUSD bears will develop a deep correction unless there are new drivers. If the US jobs report for December is weak, the euro-dollar will go down to 1.218 or 1.2145. However, it is likely to encourage the buyers to buy at a better price, as the target at 1.25 is still relevant.
EURUSD current rate in the Forex market:
EURUSD = 1.22628
1-day change: -0.38 (-0.00463%)
Morning Market Review 08/01/2021
EUR is showing a slight decline against USD during today’s Asian session, developing the “bearish” signal that formed the day before. Noticeable pressure on EUR was exerted yesterday by macroeconomic statistics from the eurozone, which came out significantly worse than expected. The volume of Retail Sales in November fell by 6.1% MoM after rising by 1.4% MoM in the previous month. Analysts had expected negative dynamics, but counted on a decrease by 3.4% MoM. On an annualized basis, sales fell by 2.9% YoY, while the forecasts were for an increase by 0.8% YoY. The data on consumer inflation were also negative. In December, the Consumer Price Index fell by 0.3% YoY, repeating November dynamics. Analysts had expected a slight improvement in the indicator to –0.2% YoY. Today, European investors are focused on the statistics on Industrial Production from Germany for November, as well as on the Unemployment Rate in the eurozone for the same period.
GBP is trading flat against USD during today’s morning session, consolidating near 1.3550. The decline in the instrument is due to technical factors, while fundamentally the picture changes only slightly. The pressure on GBP, as before, is exerted by the fact of the introduction of a full-fledged quarantine in the UK in response to the outbreak, which doctors associate with the detection of a new strain of coronavirus. At the same time, the vaccination campaign is rapidly gaining momentum in the country, but its effect will be noticeable later. Yesterday’s macroeconomic statistics from the UK were moderately negative. Construction PMI in December fell from 54.7 to 54.6 points against the forecast of growth to 55 points.
NZD is trading in both directions against USD in today’s Asian session. The instrument is consolidating near 0.7250 and is trying to develop the downward momentum formed the day before. Macroeconomic statistics from the USA provided some support to USD on Thursday. The number of Initial Jobless Claims for the week ending January 1 fell from 790K to 787K, which turned out to be better than expected rise to 800K. The number of Continuing Jobless Claims for the week ending December 25 also decreased from 5.198M to 5.072M. Market forecasts assumed growth to 5.2M. A strong “bullish” signal was also provided by the ISM Services PMI. In December, it rose from 55.9 to 57.2 points with the forecast of a correctional decline to 54.6 points. Today, investors are focused on the December report on the US labor market.
USD is showing moderate gains against JPY in today’s morning session, updating local highs since December 15, 2020. USD received a strong momentum for correctional growth the day before after the publication of positive macroeconomic statistics from the US. At the same time, investors are noticeably cautious on Friday ahead of the publication of the December report on the US labor market. The forecasts are quite pessimistic. In particular, it is assumed that the number of Nonfarm Payrolls in December will grow by only 71K after increasing by 245K in the previous month. The Unemployment Rate is expected to rise to 6.8%.
Gold prices are declining during today’s morning trading session, developing the “bearish” trend of Wednesday, when the pair was updating local highs since November 9, 2020. The technical strengthening of USD, which is supported by the growth in the yield of US Treasury bonds, as well as hopes for a change in fiscal policy by the administration of the new Democratic President Joe Biden, contributes to the negative dynamics for the instrument. Also, the other day, the second round of elections to the Senate in Georgia ended, where both vacancies were taken by the candidates from the Democratic Party, which deprived the Republicans of the majority in the upper chamber of the US Congress.