In anticipation of new US fiscal support, the Federal Reserve may publish optimistic forecasts for the economy, which may support the US dollar. However, the catch is that the central bank should not announce an increase in the bond purchase program because if they do, the demand for the dollar will drop.
USD: Yesterday, COVID-19 vaccination started in the US, which somehow speaks of the beginning of the end of the coronavirus pandemic. It gave optimism to investors, especially to those who were betting on the further strengthening of risky assets. Keeping the current monetary policy unchanged will have a positive effect on the US dollar, but it will not result in a new upward move against other world currencies. Clearly, the risk appetite of traders will prevail early next year, especially when the vaccine spreads across European countries.
Meanwhile, if the Fed decides to increase the volume of bond purchases today, the demand for the US dollar will seriously drop, which will result in a new upward move in the euro in the short term. And if bipartisan negotiators also manage to find common ground on the $ 908 billion bailout package, the dollar will not stop falling, which will lead to a new and powerful bullish trend in all risky assets.
The protracted negotiations on fiscal stimulus have put the Fed in an awkward position, but the central bank stands strong on its belief that a new package of measures is needed to support the economy. The observed economic problems, as Fed Chairman Jerome Powell has repeatedly stated, must be addressed through fiscal measures.
Speaking of the state of the US economy, a report on industrial production was published yesterday, and it indicated a good growth despite the rise in COVID-19 infections. Thanks to good production in manufacturing and mining, the index rose by 0.4% in November, up from the expected growth of only 0.2%. But since in the previous month, the index increased by 0.9%, the current data indicates that growth has slowed.
A report on business conditions was also published, but like the data on industrial production, it also did not affect market sentiment. Nonetheless, according to the report published by the New York Fed, the index of business conditions in the manufacturing sector fell from 6.3 points to 4.9 points in December, while economists had expected it to drop to 5.4 points. Growth has been going on for six months, which speaks of the strength of the manufacturing sector even in the face of the coronavirus. In December, 26% of respondents said that conditions had improved compared to November, while 21% claimed they had worsened.
As for the EUR / USD pair, the technical picture has not changed. Movement still depends on whether the quote breaks above 1.2165 or not, as going beyond this range will allow the euro to easily reach the levels 1.2250 and 1.2340. But if the quote consolidates below 1.2060, the EUR / USD pair will collapse to 1.1980 and then to 1.1890.
CAD: The Canadian dollar continues to gain positions even after the Bank of Canada said that economic recovery would slow if trade and investment does not increase. The central bank's governor, Tiff Macklem, believes that these areas would recover faster if rates are set to low values for quite a long time.
Aside from that, the Bank of Canada, like the European Central Bank, also expressed its dissatisfaction with the growth of the Canadian dollar against the US dollar. But so far, there is not a single prerequisite for a reversal. The bears are still aiming for price levels 1.2640 and 1.2590, however, to be able to reach this, the loonie must consolidate below 1.2688. If the quote goes above 1.2770, the USD / CAD pair will trade around 1.2688-1.2825.
Macklem also mentioned the emergence of COVID-19 vaccines, the spread of which, in his opinion, will lead to a stabilization of activity in many areas in 2021. The favorable news about the vaccine provides more accurate guidance on global economic recovery.
He also noted that there is slightly more momentum this 4th quarter than previously expected, but the current QE program will remain in place until economic recovery is sustainable. He hopes the QE program will fuel inflation, as it is what is needed right now.
JPY: Data on Japan's exports, which declined sharply in November, has led to a huge drop in the USD / JPY pair. Now, the quote is nearing the yearly low, which was reached earlier amid the growing panic caused by the first wave of the coronavirus pandemic. But for the pair to reach 102.01 and 101.20, the bears need to bring the quote below 103.20. The bull market would only resume if the USD / JPY pair returns to 104.85. Then, after that, the quote could move towards 106.15 and then to 106.80.
Going back to the data on exports, the figure fell because of the resumption of COVID-19. The report from the Ministry of Finance said it dropped by 4.2% in November, compared to the same period the previous year.
