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24.11.2020 04:05 PM
EURUSD: Janet Yellen's appointment as Treasury Secretary will further undermine the dollar's resilience.

As it became known today, the future President of the United States Joe Biden nominated Janet Yellen as the new Secretary of the Treasury. This suggests that Biden will act more aggressively on monetary and fiscal policy to return the American economy to pre-crisis growth rates as quickly as possible. Let me remind you that Janet Yellen is a former Chairman of the US Federal Reserve and has established herself as a proponent of a more stimulating approach. Biden said that along with Yellen as Treasury Secretary, he is ready to join the current policy pursued by Fed Chairman Jerome Powell.

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We, as traders, are concerned about perhaps the only question – how much the US dollar will continue to fall since the appointment of Finance Minister Janet Yellen is unlikely to strengthen the dollar's position on the world stage. During today's press conference, Yellen has already outlined the main points of her work in the proposed new post. And although she will have to go through a confirmation hearing in the Senate, there is little doubt that she will not succeed. Her views on stimulating the economy, as well as her stance on China, do not suit many Republicans. In any case, its appointment will create the prerequisites for greater harmony in relations between the two institutions, which will ensure coordination of fiscal and monetary incentives.

And if there is no doubt that the Fed and Yellen (in the future) will only increase stimulus measures to support the economy, the recent report of the European Central Bank on this topic just indicates the risks that such measures carry. According to a report by the European Central Bank, governments and central banks are currently facing an uneasy balance of economic shock, which, on the one hand, turns out to be the coronavirus pandemic, and on the other hand, is growing due to too extensive stimulus programs to support the economy. If fiscal, monetary, and fiscal support measures were vital in the first wave of the pandemic, as households and companies found themselves in very difficult conditions, then scaling up these measures after the crisis is over can lead to very bad consequences. At the very least, it will be quite a challenge to quickly abandon the incentive approach. Therefore, it is necessary to think about it now. A sudden end to support and assistance measures could lead to a cliff in household and corporate incomes, which will have a direct impact on economic activity in 2021. If the measures are maintained and even after the economic stress subsides, this will greatly reduce their effectiveness, which will lead to an incorrect distribution of capital and the preservation of non-viable companies.

Therefore, the withdrawal of emergency support measures should be carefully planned, especially in the banking sector. Let me remind you that the European Central Bank has repeatedly stated that it intends to strengthen monetary stimulus in December of this year, which limits the upward potential growth of risky assets in the medium term.

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Meanwhile, the European currency strengthened its position in the first half of the day after the release of a report indicating a strong recovery in the German economy in the 3rd quarter of this year. The data turned out to be much better than economists' forecasts, which remains quite optimistic about the pace in the 4th quarter of this year. In general, GDP growth was directly related to increased personal consumption, which increased by 10.8% compared to the 2nd quarter. The improvement in the labor market, together with government support measures after quarantine restrictions, also contributed to an improvement in consumer sentiment. The only industry that declined in Germany in the 3rd quarter of this year was construction.

As for the figures, Germany's GDP for the 3rd quarter of this year was revised up to 8.5% from 8.2%. Economists had expected GDP growth of 8.2%. Compared to the 3rd quarter of the previous year, GDP decreased by 4.0%, not by 4.3%, as previously expected.

There is no doubt that this winter will again be a test for German companies and businesses. And although the indicators for the current sentiment were quite high, the foggy future due to the second wave of the coronavirus pandemic spoils expectations. Given the fact that there is no talk of lifting restrictive measures in the EU, following the example of the UK, it is likely that Germany's GDP will shrink in the 4th quarter compared to the 3rd quarter. However, the restrictions that are imposed apply to a smaller part of the economy and practically do not affect the industrial sector, which is the leading one for the German economy, which leaves hope for a good end to the year.

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As for the numbers, the IFO Institute's German business sentiment index in November this year was at 90.7 points, while economists had expected the figure to be 90.6 points. In October, the indicator was at the level of 92.5 points. The German expectations index also fell to 91.5 in November from a revised October reading of 94.7 points. But the index of current conditions in November was almost unchanged, falling only to 90.0 points from 90.4 points in October.

As for the technical picture of the EURUSD pair, the next attempt to break through the resistance of 1.1890 was unsuccessful, which forced the major players to retreat. Only a real consolidation at the level of 1.1900 forms a new upward push of the pair to the highs of 1.1960 and 1.2010. It will be possible to talk about the return of pressure on risky assets after sellers cope with the support of 1.1800, the breakdown of which will quickly lead to the demolition of several buyers' stop orders and the fall of EURUSD to the lows of 1.1750 and 1.1710.

Jakub Novak,
Analytical expert of InstaForex
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