Central Banks And Stimulus Bets Will Drive FX This Week

  • USD Slides As Stimulus Bets Gain Traction
  • EURO Shrugs Off Weaker German IP
  • New Highs In Stocks Drive AUD, NZD Higher
  • GBP Hovers Near Strongest Level Since May 2018
  • CAD Holds Gains As Oil Hits 1-Year Highs

 

Chinese New Year is days away and for many investors, it is the most exciting event this week, especially with a light economic calendar. It is not as big a holiday as Christmas or New Year’s, but with more than 1.5 billion celebrants, there will be less participation and possibly consolidation. Most of the major currencies traded higher on Monday as stocks hit fresh record highs. The improvement in risk appetite drove the lower across the board. 

 

Three things will drive currency movements this week – the direction of stocks (risk appetite), U.S. stimulus headlines and central banks. To be clear, there are no central bank meetings on the calendar, but we’ll be hearing from the heads of nearly all of the major central banks. This includes Fed Chairman Jerome Powell, ECB President Christine Lagarde, Bank of Canada Governor Timothy Lane and Bank of England Governor Andrew Bailey. They are all scheduled to speak on Wednesday. Considering that most central bankers are optimistic about the recovery and worried about inflation, most of their comments will not pose a threat to current rallies. As new virus cases continue to slow, optimism will grow, encouraging further gains in currencies.

 

All of this hinges on new fiscal stimulus from the U.S. government. A path became clear on Friday when the Senate endorsed President Joe Biden’s $1.9-billion trillion stimulus package after Vice President Kamala Harris cast the tie-breaking vote. The House should pass this relief package over the next two weeks and Biden hopes to have Senate approval and the final package signed by March 15. Although a higher minimum wage is off the table, a $1,400 stimulus cheque appears to be a done deal. As more positive stimulus news comes in, stocks should extend their gains. The U.S. dollar, on the other hand, should suffer as more spending leads to bigger deficits. rejected the 200-day SMA and could slide down to 104.50. The consumer price report is the most important piece of data on the U.S. calendar this week, but higher inflation won’t cause the Fed to budge.

 

Meanwhile bounced off the 100-day SMA despite weaker German industrial production. The virus situation is improving across the region, including Germany, but the German government is not ready to relax restrictions. Vaccination rates are still low and worries about the UK and South African variants could mean that countries in the Eurozone that were among the first to tighten restrictions in the winter could be among the last to ease them. EUR could underperform its peers, but the market’s risk appetite will determine how EUR/USD trades. 

 

Although started the week lagging behind other major currencies, it trades near 2.5-year highs. A lot has been said about how quickly and efficiently the UK government is vaccinating its citizens. At the current rate, it is feasible for the entire population will be vaccinated by early to mid-summer. While this goal is still ambitious, the prospect of phased easing is not. In two weeks, Prime Minister Boris Johnson will release the country’s full road map for easing the national lockdown and the excitement that comes from this should keep sterling bid. 

 

Countries with low virus cases and strong fundamental outlooks produced the day’s performing currencies. No economic reports were released from Australia and New Zealand but and led the gains. The also trended higher as hit fresh one-year highs. But its gains were more modest compared with AUD and NZD.

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