The first week of 2021 began in the markets with an unexpected sharp growth of the US dollar and a decline in demand for risky assets amid tensions on confirming the winner of the presidential election, namely Mr. J. Biden.
Markets pay attention not only to this event, but also to the issues regarding the massive vaccination of the population in Western countries. Investors did not even pay attention to what happened in Washington last January 6, focusing on the possible economic policy of the new US president. Generally, it can contribute to the continuation of stimulus measures, leading to the continuation of growth in the global stock indices.
On Thursday and Friday, investors finally noticed the publication of important economic data. They initially focused their attention on the release of Europe's consumer inflation, which remains in a negative zone, just like retail sales. It is understood that the expansion of restrictions due to COVID-19 contributed to the publication of these weak statistics, which is expected to further affect Euro's ability to strongly recover this year.
At the same time, strong values of the purchasing managers' index in the US, which led to the growth of global stock indices, managed to please the markets on Thursday. But as for the US employment data released on Wednesday and Friday, it should be recalled that they turned out to be extremely negative. Investors perceived their negative values as the most important argument that the new administration of J. Biden will be forced to further pump up the financial system with dollars, which is clearly a strong supporting factor for the growth of demand for company shares and other risky assets.
In our view, all these are threats to continue the process of inflating financial bubbles in the future, which will eventually burst especially in America. However, the markets are not thinking about it yet, as they live in the present. In fact, investors argue that the worse the economic situation is, the more dollars can be obtained through various assistance and incentive measures, which means that they will continue to buy company shares and commodity assets.
But the question arises: Why did the US dollar receive support last week, when it has traditionally always weakened when the demand for risky assets grew? This can be only explained by the strong growth in Treasury yields, which supports the dollar exchange rate and the likely growing fears that the collapse in the US labor market may not be local. If this happens, investors may continue to avoid risk, which will eventually support the US currency.
This week's development of events will continue to depend on the publication of statistics. In general, we believe that the upward trend will continue in stock indices, but the possibility of resuming the dollar's strength is uncertain. Here, it is necessary to closely monitor the dynamics of the US Treasuries yield. If it stops and even begins to correct below, then the US dollar is likely to further decline in the currency markets.
Forecast of the day:
The EUR/USD pair is holding at a local low of 1.2175 amid a decline in investors' risk appetite. We believe that if the market mood does not improve, the local correction may continue to 1.2060. Alternatively, if the pair holds above the level of 1.2175 and the markets come positive, the pair will further rise to the level of 1.2235.
The AUD/USD pair is trading at the level of 0.7700. It is under pressure, despite positive data on Australia's retail sales and China's consumer inflation. This is because it is negatively affected by the general decline in demand for risky assets. We believe that it can either further decline to 0.7640 or rise to 0.7800, depending on the mood of investors.