22.01.202110:37 Forex Analysis & Reviews: EUR/USD: Tax for wealthy Americans will be increased. Meanwhile, the EU is heading towards a double economic recession.

The announcement of the ECB yesterday was unexpected. Its president, Christine Lagarde, said the EU economy is heading towards a double recession, but noted that the current bond purchase program is sufficient to offset it.

Exchange Rates 22.01.2021 analysis

In particular, Lagarde expects output to decline again this 1st quarter, as the ongoing lockdown is sure to disrupt activity in all sectors. And, as a result, GDP will most likely shrink in the first three months of this year.

In any case, the ECB still left interest rates unchanged, which is what many expected. Refinancing rate is still at 0%, while the rate on deposits is at -0.50%. The ECB reiterated that it will continue to maintain a very loose monetary policy.

With regards to the bond purchase program, the central bank also retained its current scope and scale. It will continue buying bonds worth € 20 billion monthly, but if necessary, the governing board is always ready to adjust all of its instruments.

Exchange Rates 22.01.2021 analysis

More detailed discussions (related to monetary policy) will take place at the next meeting in March. Lagarde said by that time, new economic data will be available, and the situation with COVID-19 will become clearer.

On the bright side, vaccinations, which began at the end of last year, are promising a faster resolution to the current health crisis.

Funds created for the EU are also helping sustain economic recovery.

But on a published data yesterday, consumer confidence in the EU was revealed to have deteriorated this January, dropping to -15.5 points, which is a bit lower from what economists had expected. This data was collected from January 1 to January 20, and the final figure will be published on January 28.

Exchange Rates 22.01.2021 analysis

As for the United States, news emerged that future Treasury Secretary Janet Yellen is working to push for changes in the tax code, which did not appeal to all investors. This is because taxes for corporations and wealthy Americans will be increased, as Joe Biden and his administration is trying to make efforts to reduce infrastructure costs and do more social protection for the population. Yellen is awaiting Senate approval of her candidacy for the post of US Treasury Secretary. The Senate Committee is scheduled to vote on it today, although a full Senate approval vote may not take place until next week.

Meanwhile, on his first day at the White House, Joe Biden signed another package of documents aimed at implementing his plans to counter the spread of the coronavirus. The Biden administration plans to focus efforts on more active vaccination of the population, as well as the availability of tests for COVID-19.

With regards to macro statistics, a report from the US Department of Commerce said the volume of US housing construction in December rose from the previous month. Thus, the number of new homes (commissioned in December 2020) increased by 5.8%, to 1.669 million a year. Economists had expected a less modest rise in the indicator, by only 0.8%, to 1.560 million. Building permits also rose by 4.5%, totaling to 1.709 million a year.

As for the labor market, it continues to show very weak indicators, demonstrating weekly growth in applications for unemployment benefits. A report released by the US Department of Labor said initial claims were 900,000 last week, down by 26,000 from the previous week. Economists had expected the number to fall to only 910,000.

Exchange Rates 22.01.2021 analysis

But the moving average rose to 848,000, which suggests that outlook may improve, especially amid wider vaccine availability.

Meanwhile, other economic reports, which are scheduled to be published today, may lead to a surge in market volatility. Retail sales, lending data and UK procurement briefs are expected to come out this morning.

With regards to the EUR/USD pair, the picture remained the same. Bulls have spent a lot of energy to keep the market on their side. However, an upward trend will resume only if the quote consolidates above 1.2180. Such a move will enable EUR/USD to reach price levels 1.2230 and 1.2280. But if the bears manage to regain control of the market, the euro could fall to 1.2090, and then drop to 1.2055.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

Jakub Novak,
Odborný analytik spoločnosti InstaForex
© 2007-2021
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