Biden’s ambitious stimulus package to drive direction for the week
USD: Fed likely to continue spending
Spot
DXY90.266
Week ahead bias
Neutral
Weekly range
90.00 - 91.00
1 month target
90.00
Politics in Washington could move the greenback in either direction this week. On the one hand, focus will return to the Senate and we can already see a tussle between the Democrats and Republicans as to whether Biden’s $1.9trn stimulus plan will progress in its current form or be dismantled. With cash holdings in the US at the lowest levels since 2013, a spluttering stimulus plan may be risk negative and dollar positive. On the other hand, Wednesday’s FOMC meeting should see the Federal Reserve maintain its dovish outlook and recommit to buying assets.
On the data front there is lots to look forward too this week. The highlight will be the first look at 4Q20 GDP. We’ll also see January’s consumer confidence and December’s personal income and spending data. In addition to US data, the IMF will release an update of its World Economic Outlook (WEO) on Tuesday. Chances are that it will probably revise 2021 US growth higher and eurozone and perhaps Chinese growth a little lower.
Keystone XL pipeline a significant risk for the loonie
Spot
USD/CAD1.2707
Week ahead bias
Neutral
Weekly range
1.2600 – 1.2800
1 month target
1.2600
The loonie has shown some good resilience this past week despite the bad news for Canadian oil producers with Biden revoking the permit on the Keystone XL pipeline. The project was a fundamental part of the plan to solve the long-standing issue of insufficient pipeline capacity in Canada. The impact of this decision will remain in the background as long as crude demand stays low but will most definitely be an obstacle to Canada's longer-term economic outlook.
What did help CAD this past week was the Bank of Canada policy announcement. While keeping all policy measures unchanged, the economic projections showed a more upbeat tone on the medium-term outlook and Governor Tiff Macklem downplayed any need for extra stimulus. He also commented on CAD, signalling more appreciation could hinder the recovery, although he acknowledged this has been largely caused by broad-based USD weakness. This week, two data releases will be in focus: November retail sales and November GDP. The CAD is likely to remain driven by external factors including market sentiment when it comes to US fiscal stimulus plans.
EUR: Continues to remain resilient but will the currency strength last?
Spot
EUR/USD1.2163
Week ahead bias
Neutral
Weekly range
1.2000 – 1.2300
1 month target
1.2200
EUR/USD held up well over the last week, with the European Central Bank backing away from its full use of the Pandemic Emergency Purchase Program. That said, the current environment does not look poised for a EUR/USD advance with Italian politics continuing to deliver a sting. For the week ahead, we’ll be looking to see what impact broadening lockdowns are having on the continent and whether ECB President Christine Lagarde and Chief Economist Philip Lane will try to address the modest sell-off in eurozone debt markets with more dovish commentary.
We will also hear from German Chancellor Angela Merkel and French President Emmanuel Macron at the virtual Davos – also joined by Chinese President Xi Jinping. Presumably, Covid and climate change will top the agenda.
GBP: Steady and underwhelmingly neutral
Spot
GBP/USD1.3646
Week ahead bias
Neutral
Weekly range
1.3450 – 1.3800
1 month target
1.3900
There continues to remain a neutral view on GBP/USD for the coming week. A fair amount of good news is now priced into the currency. Coupled with a neutral view on the risk environment next week, there are limited catalysts for GBP to move decisively in either direction next week.
On the data front, the material miss in the UK Services PMI reversed the prior GBP gains. While the majority of manufactures reported a worse supplier performance (linked to Brexit) the PMI miss does not tell us much about the GDP figures, suggesting there's no long-lasting negative impact on GBP. The focus next week will be on the UK employment numbers. The jobless rate is set to increase further (towards 6% in November), but the impact on GBP should be limited.
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