As expected, the US President-elect Biden presented a plan to stimulate the economy, but the market's reaction to the speech was quite unexpected. Externally, the plan is in line with the expectations – one-time payments to families will increase from $ 600 to $ 2,000, which will require additional spending of $ 1 trillion: 415 billion will be allocated to combat COVID-19, while the other 440 billion is to help small and medium-sized businesses affected by the pandemic.
However, there are two points that don't look as expected. First, Biden talked about an unpleasant idea for investors regarding a possible tax hike, which will partially compensate for the increased costs. And secondly, the idea of raising taxes indirectly indicates a decrease in the Fed's support for this stimulus package, which will not increase QE. Accordingly, there is a suspicion that the growing budget hole will be partially closed at the expense of taxpayers themselves, which is very unlikely to contribute to the growth of optimism.
In fact, anyone does not refute the need for incentives. The ISM index in the service sector unexpectedly declined below 50 pips. December's retail sales growth is also negative, which is especially alarming given the season of Christmas sales. The consumer confidence index from the University of Michigan is falling as well.
Industrial production growth of 1.6% in December is no longer interesting to anyone, as this is the latest greeting from Trump's economic program to make America great again. Now, all the attention is on finance, which turns out that the market ambiguously sees new prospects. The passage of the new bill through the Senate is unclear - 60 votes are required, that is, it is necessary for at least 10 Republicans to support the package. But this is hardly possible, given the initiative to impeach Trump. Thus, there will be another negotiation, which risks being delayed until spring, and the idea of a possible tax growth has already been announced.
The market clearly did not like the new initiatives, so the sale of risky assets looks natural. The decline in stock indices objectively contributes to the strengthening of the US dollar, which starts the week as a favorite.
The target price continues to be inclined downwards, although the CFTC report was in favor of the euro (cumulative long position rose by 1.806 billion to 23.787 billion). Nevertheless, there is an unexpected, but quite rational explanation.
The players reacted to the results of the Capitol attack and the approval of the electoral votes in Congress, which meant the final victory of the Democrats. And since the entrance of the "blue wave" was regarded as a practically solved launch of a new stimulus program, speculators reacted by reducing demand for the dollar. Such a decline would be a natural course of events if the previously stated positions of the Democrats were confirmed.
However, Friday turned out to be filled with surprises. The negative effect of declining stock indices and a sharp demand for defensive assets put more pressure on the target price than CFTC's positive report. In this case, the EUR/USD pair reached a strong support at 1.2055/60, from which an upward pullback is likely to resistance 1.2130/35 or 1.2170/75. Here, the continuation of the sell-off is possible.
The pound looks noticeably more confident than the euro, which is somewhat unexpected. Based on the CFTC, net long position rose by 793 million, to 1.105 billion, while the FTSE 100 stock index shows significantly better dynamics than the US indices.
Investors may assume that the UK will gain more advantages than the EU after the trade negotiations are completed. In any case, demand for the pound is now consistently stronger than for the euro. There are no economic reasons for such enthusiasm – the trade deficit sharply increased in November, industrial production is also in the deep negative zone, and NIESR believes that the second lockdown will lead to a decline in GDP in Q1 by 3.4%.
From the point of view of technical analysis, technical signs of a downward reversal will not be observed as long as the pound holds above the level of 1.35. Financial flows are in favor of the growth of GBP/USD pair, so it can be assumed that the strategic goal of the bulls, that is, to reach the resistance zone of 1.4300/50, is likely to succeed in the medium term.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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