22.01.202116:54 Forex Analysis & Reviews: Dollar gives off buy signal

Exchange Rates 22.01.2021 analysis

Western markets traded in the negative zone before the weekend, which is most likely due to the correction after the rally. The markets have absorbed the maximum of positive news and are now looking for new drivers for growth or decline.

The main events next week will be the meeting of the US Federal Reserve, the publication of data on the US economy, and orders for durable goods in the country. Germany will present GDP statistics, and the United Kingdom to release data on the labor market.

The focus is on the topic of the pandemic. European authorities are discussing the possibility of longer lockdowns. In the United States, the new president signs decree defining strategies to combat coronavirus.

The main focus now is on vaccination, which is currently faced with problems. Insufficient government funding prevents the vaccination company from becoming more active. It would seem that the $1.9 trillion stimulus package presented by Joe Biden could solve everything, but there may be obstacles in this matter. The fact is that the lawmakers may not accept the Biden plan in its original form. A $1 trillion package seems more realistic, if not less. With such a scenario, investors' optimism will diminish.

According to House Speaker Nancy Pelosi, the detailed study of the bill will begin next week. During this time, the peak of the reporting season will also pass, which means that volatility will increase in the short term.

The US dollar also started a correction on Friday against the background of a decrease in demand for risk, but one should hardly expect significant movements or a change in trend. After a difficult year in 2020, it has been just above the 90 point mark for more than a month. The USD index is likely to continue to trade within the range of 90–91 points established in recent sessions. There is no reason for a stronger breakthrough, at least for now. At the same time, there are no grounds for another departure to the 89 point mark

Exchange Rates 22.01.2021 analysis

Market forecasts are mainly based on a further decline in greenback. However, opposite opinions appear, which is important. Everything can change, and positive factors for the dollar can support, including US stocks.

The biggest negative for the dollar will be the recovery of the countries most affected by the pandemic faster than the US economy. Since this driver is key to the dollar's fall, it may gradually exhaust itself.

As soon as vaccination will increase the rate of growth of activity, the Central Bank can begin to normalize monetary policy. Due to the annual increase in the spread between the key rates of the Fed and the ECB, Treasury yields will rise, while the growth of yields on government securities of the eurozone will be tough. Against this background, the attractiveness of the dollar on the world stage will increase.

Although now the leadership of the American regulator says that it will not raise rates until 2023, everything is possible. As soon as the situation changes, the Fed's opinion will also change. As a rule, interest rates are increased during periods of strengthening economic activity, as the Central Bank tries to prevent inflation from accelerating too quickly.

This is a distant prospect. Now traders are negative about the dollar and prefer to open short positions. At the same time, with any unexpected strengthening of the dollar, they can rebuild. The rise in the rate will force the holders of short positions to start buying the greenback to close these positions.

The topic of vaccination has not yet exhausted itself, if last year there was infinite optimism from it, now there are reasonable doubts. Any reports of a slowdown in the campaign or drug ineffectiveness could lead to a situation similar to March last year when investors pumped the dollar well in pursuit of shelters. Also, such news will only harm the economy and US stocks, since it will be short-term.

If we talk about the long-term prospects for the recovery of the dollar, then they are based on a serious growth rate of activity in the United States compared with other countries. This factor will also contribute to the active growth of the US stock markets.

Natalya Andreeva,
Analytical expert of InstaForex
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