This article was published in English on 26.01.2021.
Kathy Lien, Managing Director of UK Asset Management Currency Strategy
The Fed finishes the first FOMC meeting of 2021 on Wednesday, and according to the performance of US assets, investors do not expect a surprise move from the central bank. Stocks bearish signs that investors want stable policy. This means continued commitment to expansionary politics, accompanied by optimistic expectations for a recovery in the second half. It’s no secret that December is hard. The US reported job losses for the first time since April, with consumer spending falling and rising for the third month in a row. Increased cases of new viruses across the country led to many states to restrain them, but none of them destroyed investor optimism. Because the ongoing vaccine distribution has instilled in everyone the confidence that there will be a recovery in the second half.
Coming to the January policy meeting, the question of whether the US dollar will be sold or bought depends on two things: Fed Chairman Jerome Powell’s expectations for a recovery and his comments on the reduction of the bond purchase. A number of Fed heads over the past month have revealed that if the recovery is strong enough, the reduction could begin in late 2021. If Powell shares this sentiment, he could exceed 104.00 and break 1.21.
In December, Powell offered some important clues as to where he was standing. At that time, the central bank raised its growth expectations and refrained from extending the maturity of asset purchases in a move that was seen as less dovish. Powell also said that vaccines could allow the economy to perform strongly in the second half of 2021, but the central bank will have to continue its bond purchases until significant progress is made on its goals. Regarding the reduction, Powell stated that the central bank would give “plenty of warnings” before reducing the bond purchases.
Stocks are close to record highs and President Joe Biden is promising more incentives as more Americans are vaccinated every day. Unpredictable reduction statements may cause the recovery to deteriorate. There is no doubt that they will discuss this more, but the year has just begun and Powell can wait another month or two before laying the groundwork for reducing incentives. For all these reasons, we think that even if the US dollar rises on the positive comments of Powell, the rally can be seen as a high selling opportunity as the dollar will continue to decline inevitably unless Powell supports the reduction rhetoric.
It was the best performing currency for the second day in a row. In contrast to manufacturing, which experienced a major contraction in December, the contraction in the service sector decreased with the PSI index rising from 46.7 to 49.2. Service spearheaded the fall in November and may now lead to recovery. We won’t know this until next month, but for now, low virus cases, weak US dollar and good data are contributing to the rally. Australia and its dollars also rose. If tonight’s report shows CPI growth accelerating in the fourth quarter, the pair is likely to continue to increase.
It closed at a 2.5-year high on business data that was better than expected. There is less job loss and strong wage growth, thanks to the country’s unpaid leave program. New virus cases have also begun to fall, which is positive for the country’s expectations. With no data on the calendar, the Euro lagged behind all the majors.
Original (English) Text for Kathy Lien’s free Trading report