Cautious Fed Keeping Bearish USD Prospects in Place
USD: The greenback continues to benefit from the ongoing equity market correction (partly caused by disappointing earnings) but as long as this is just a correction within a medium-term trend of an ongoing recovery, the impact on USD should not be long-lasting. Indeed, the cautious message from the Fed yesterday points to a continuation of the loose monetary policy (and toning down expectations of a policy reversal in the coming quarters) suggests deeply negative US real rates are here to stay. Assuming the global economy starts recovering in Q2 after the tough winter months, this should facilitate further USD decline.
CAD: December building permits release is expected to show a 5% m/m decline after registering a 12.9% gain in November. Yesterday’s daily reversal has now shifted short term bias to a resistance just below the 1.29 figure. The CAD which remains more closely correlated to commodity prices than risk/stocks at the moment. Given the rise in commodity prices it is hard to argue persuasively that the CAD will weaken even further in the short term. Look for more range-trading near term.
EUR: ECB continues its fight against the strong euro, with ECB officials commenting that the market is underestimating the odds of rate cuts. Still, we don’t expect the recent verbal interventions to do much damage to the euro as (a) the market is already pricing c.70% probability of a 10basis point rate cut within a year, and (b) there is not much else the ECB can do beyond the already partially priced-in rate cut. With the trade weighed euro below its six-month average and EUR/USD around 1.21, one may question the timing of the ECB verbal intervention and why the ECB didn't keep its powder dry for more pressing times, particularly as we are likely to see diminishing marginal impact of every next verbal intervention as long as it is not followed by actual measures and valid threats. ECB comments may delay, but not derail EUR/USD strength this year as USD stays soft throughout 2021.
GBP: The political jitters between the EU, AstraZeneca and the UK don’t appear to have a negative impact on GBP. Yet, markets have their sights on the roll-out of vaccines in the UK, with nearly 6mn Britons having received at least a first dose of the vaccine to date (roughly 500k have received a second dose). We believe the GBP should continue to gain on its key peers, particularly against the EUR with the currency bloc falling behind in its vaccination efforts.
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