The main topics of the foreign exchange market concern the US dollar. Washington's political and economic positions are driving the USD into a devaluation trap, but there are nuances. The day before, Joe Biden announced stimulus measures. Formally, the markets should be happy with this development. However, this time the rapid growth occurred not on the stock markets, but in the yields of treasuries. In other words, markets are asking who will pay for a holiday of economic stimulus.
Scenarios for the dollar are difficult to determine because of the Fed's persistent silence on the possible expansion of the quantitative program. Obviously, current purchases are not enough to finance future fiscal measures.
The dollar has grown, but will inevitably return to the path of weakness if the US regulator talks about increasing quantitative incentives. In this regard, the probability of a weak dollar in 2021 is higher than the probability of its strength, analysts say.
Markets focus on the inauguration of the US President on January 20. Janet Yellen is expected to reaffirm the strong dollar policy at her confirmation hearing on Tuesday. Washington appears to be returning to its traditional stance after Donald Trump challenged the strength of the dollar during his presidency, claiming it gives other countries a competitive edge.
"The value of the dollar and other currencies must be determined by the markets. Markets adjust to changes in economic performance and generally contribute to the adjustment of the global economy," the American media write. They expect a statement of this nature from Yellen.
Traders have heavily shorted the US dollar. The value of the speculative position has reached its highest level in 10 years. This happened, among other things, in anticipation of a further increase in the US trade and budget deficit under the new administration.
The investment community is now reconsidering its attitude towards the dollar. Today, the USD index has strengthened its recovery dynamics. The dollar is likely tuning into a more substantial pullback after last year's drawdown. Trading around the 90.8 mark, the dollar index is in close proximity to the resistance area of 91. A more complete upward correction can quickly take the dollar to 91.3, and then to the round mark of 92
The current growth of the dollar has given rise to talk about a reversal of the long-term downward trend, but not everyone believes it yet. For example, Goldman Sachs and Bank of America respondents continue to bet on a further decline in the dollar.
"During this year, the dollar will continue to fall in price. At the same time, currencies tied to the dynamics of the global economy, especially the currencies of developing countries and the Australian dollar, will rise in price," JPMorgan representatives said.
Before Yellen's speech, speculators raised rates on the dollar's decline to a record high since April 2018.
In favor of dollar growth
The political upheaval over the change of power in Washington is an important component of market sentiment. However, there is another important component that is becoming difficult for investors to overlook. We are talking about negative news on the spread of coronavirus, its new strains, vaccine shortage and serious side effects of the drug.
By the end of last year, when Pfizer announced a drug against the virus, risky assets were rallying as markets hoped that the pandemic could be dramatically improved by a vaccine by spring or summer. Now it becomes obvious that they miscalculated, such optimism was unjustified, and a record short position was accumulated against the dollar.
Currently, there are signs of a reduction in such positions. The euro is also a factor in the recovery of the dollar. The comments of the head of the ECB that the regulator is closely monitoring the euro exchange rate, somewhat spooked buyers. While the political aggravation in Italy played on the side of the "bears" of the EUR/USD pair. The Government of the country will have to survive an important vote in parliament
Over the past week, the main currency market tandem lost about 2%. The fall is likely to continue. The euro is trading at 1.207, returning to last December's lows. The next area of support is 1.195, a former strong resistance.
Considering all of the above factors, the dollar's strengthening may continue, at least this week.
