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25.01.2021 05:54 PM
EUR/USD: Dollar will not easily decline despite euro's attempts to set higher records

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The greenback strengthened against almost all of its main competitors amid the retreat of US stock indices from record highs on Monday.

Market participants seem to begin to question Joe Biden's ability to accept a $1.9 trillion stimulus package and dispense 100 million doses of the COVID-19 vaccine in the first 100 days of his presidency.

Mass vaccinations in America are not progressing as quickly as previously expected, as many states faced vaccine supply restrictions.

Meanwhile, Republican leaders in the Senate are opposing the new stimulus program. Mitt Romney said he doesn't expect a new stimulus package to be adopted soon, while Roy Blunt believes the plan is doomed to failure.

The newly-appointed US President will likely need bipartisan support to advance his plan, as Democrats control the Senate with only a minimal margin.

The Fed, which is scheduled to hold its next meeting this week, is expected to closely monitor developments on these fronts.

Following the results of the January meeting, the US Central Bank in its statement may focus on short-term risks, while not excluding the likelihood of an active recovery of the national economy. This may support the greenback.

If the chairman of the Federal Reserve Jerome Powell signals that the regulator does not plan to curtail measures to support the US economy soon and confirms its commitment to an ultra-loose monetary policy, this will negatively affect the USD exchange rate.

"We believe that the Fed has no reason to cut incentives at this stage, even if some market participants are trying to read between the lines, looking for signs of tightening incentives," said State Street Bank. They predict that the dollar will remain in a downward trend.

MUFG strategists adhere to a similar point of view, saying that, "The process of curtailing the quantitative easing program by the US Central Bank is likely to be gradual and may last throughout 2022. Then, perhaps, the first increase in the Fed's interest rate will follow - in 2023. We continue to believe that it is too early to expect a recovery in the dollar and still see opportunities for further weakening of the American currency this year."

Although the USD Index closed last week with a 0.1% gain, to 90.2, it posted its biggest weekly decline since mid-December.

Despite the negative attitude to risk, the euro became one of the leaders in Friday's trading. Having felt the local bottom in the region of $1.2055, the single currency then rose, ending the last five-day period near $1.2170.

The EUR/USD pair began a new week on a high note, on the outskirts of 1.2200, and then pulled back to 1.2120.

The pressure on the euro against the US dollar came from a report published on Monday by the IFO research institute, stating that the business confidence index in Germany fell to 90.1 points in January from 92.2 points recorded in December. Experts had expected the indicator to decline only to 91.8 points.

In addition to the Fed meeting, which will undoubtedly be a major event in the coming week, investors should pay attention to the data on durable goods orders in the United States (on Wednesday), the number of initial jobless claims in the United States (on Thursday), and on personal income and expenses of Americans (Friday).

Moreover, preliminary estimates of US and German GDP for the fourth quarter are due this week.

The immediate strong support for EUR/USD is at 1.2100. A breakout of this round mark may target the pair to the key support area of 1.2050-1.2055, from where the bears will head for the psychologically important level of 1.2000.

Meanwhile, the bulls need a clean break of the round 1.2200 mark. This will clear the way for them to 1.2240 and then to 1.2300. If the last level is broken, it will allow the pair to resume the previous upward trend.

Viktor Isakov,
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