The report of the US Department of Labor on import and export prices in December played in favor of rising inflation expectations. Prices for exports in December rose by 1.1% against the forecast of 0.5%, and imports by 0.9% against 0.6%. Despite the fact that these indicators are considered not too important, they reflect the general trend of rising inflation expectations and therefore play in favor of a stronger dollar.
The most important event today is not Trump's impeachment, which will still not pass the Senate, but the publication of Biden's detailed economic plan. In the heat of the pre-election rhetoric, a lot was promised, but now there is no urgent need for new tax breaks, and the budget deficit has grown beyond all decency. There may be surprises in the plan that will lead to strong volatility, the demand for risk decreases, which is reflected in the fall in commodity prices and lower yields, so at the end of the day, it is likely that we will see a strong increase in demand for defensive assets due to the threat of a stronger dollar and easing stimulus expectations.
EUR/USD
In the previous review of the euro, we noted that the settlement price unexpectedly went down, which increased the chances of a deep correction. Indeed, the euro has rapidly rolled back to the levels of early December, and, apparently, this is far from the limit.
The main reason, as it seems, comes from the different orientation of inflation expectations. If in the US, December inflation showed growth above forecasts, then in the eurozone it was stuck at -0.3%, which is the fifth consecutive value below zero.
Inflation expectations, however, still continue to grow, and this is now the main reason why the current correction is still too early to consider a full-fledged reversal.
Along with inflation, another factor contributing to the correction of the euro is the faster spread of covid in the eurozone than in the US, with simultaneously slower vaccination rates. In February and March, new covid restrictions are possible (for example, Angela Merkel said that 10 weeks of quarantine are possible from mid-January), in the Netherlands and France, vaccination is extremely slow due to massive mistrust of the vaccine, which increases the chances of blockages in these countries.
However, banks are mostly predicting just a couple of months of slowing recovery, after which the eurozone will accelerate the pace of recovery and the euro's outlook will improve again. The sentix overall economic index has risen above zero for the first time since February 2020, while investors are ignoring current restrictions and waiting for positive vaccination results.
The dynamics of the estimated fair price has not changed much since Monday, and the euro will remain under pressure.
The main target is still 1.2050 / 60, where the formation of a local bottom may begin before another wave of growth.
GBP/USD
Retail sales growth in December, according to the BRC, was 4.8% YoY, which was significantly worse than forecasts. BRC Chief Executive Helen Dickinson said 2020 was the worst year on record and the government should announce an extension of benefits for the worst-hit businesses as soon as possible to avoid unnecessary job losses.
The expectation of new incentives becomes the dominant idea, which gives its positive effect against the background of serious problems with covid. The pound remains among the leaders in growth, at the beginning of the week it was supported by the Bank of England Governor Andrew Bailey, who said that "...in the near future, the Bank of England is not considering the possibility of introducing negative rates." That's right, the players are waiting for action from the government, and not from the BoE since the Brexit that finally took place requires the concretization of many points of the economic program.
The target price is held above the long-term average, this is not a guarantee of growth, but a sign of a stronger position than the euro.
Despite the fact that the pound looks more confident than others, the chances of breaking the resistance of 1.37 are low. On Friday, an extensive package of macroeconomic data will be published, plus NIESR will give its estimate of GDP, and the pound can either change direction or stay in the range, any option is possible.
