The US dollar is continuously strengthening in the currency markets, which started at the beginning of this year. This strength remains during the second week except for a short-term consolidation.
Global markets ended the previous trading week with a decline in stock indices and a growth in the dollar's demand. This is how investors actually reacted to the strong rally at the end of 2020, which was primarily inspired by the introduction of coronavirus vaccines, as well as the promise of Congress and the US President-elect Joe Biden to take new measures to support the country's population and economy.
However, it already became clear as this year started that the ongoing pandemic, political instability in the US and the overall large-scale problems in the country and in Western countries, do not contribute to the growth of optimistic moods in the currency markets. On this wave, an important question is raised before investors – what is happening in the markets? Is it just a small corrective pullback or the start of large-scale corrective decline after the recovery in demand for risky assets last spring?
It can be assumed that there are actual reasons for the correction to continue, since all the positive and important reasons listed have already been used up by the markets. It is very likely that it will be weaker than expected with the beginning of the reporting period of the companies for the fourth quarter of last year. In addition, extremely negative trends in the US labor market and growing inflationary pressures become reasons for fixing previously received profits.
The dynamics of the currency market, as well as the stock, commodity and debt, is completely dependent on these processes. We can even say that it depends even more on everything that happens.
On another note, the euro's strengthening is clearly unjustified. Lockdowns in European countries due to COVID-19 continue to hold back its recovery. In such a situation, the growth of the euro is simply bad for its economy. This is the reason why several market participants expect the ECB to make a tough reaction on this issue at the next meeting of the regulator. The behavior of other major currencies in a pair with the US dollar also fits neatly into this outlook.
Analyzing the general market situation before Biden's inauguration on January 20, which may stimulate the rising tensions in the United States, it is likely that the markets will either continue to decline or the dollar rate will strengthen; otherwise, the consolidation process will begin. The further dynamics will depend largely on what is happening in this country.
Today is a holiday in the USA in celebration of Martin Luther King Day. Thus, there will not be much market activity.
Forecast of the day:
The EUR/USD pair is trading above the level of 1.2060. After this level is broken, it will lead to a further decline to the level of 1.2000.
The AUD/USD pair is forming a "triangle" pattern, which can be directed both up and down. Today, if the price does not hold above the level of 0.7680, it may decline to 0.7635, and then the formation of this pattern will stop. On the contrary, if the price holds, a local price growth will most likely continue to the level of 0.7790.
