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FX.co ★ Markets await Yellen's statements on the USD exchange rate. The EU is preparing a plan to cast off dependence on the US.

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Forex Analysis:::2021-01-19T10:33:51

Markets await Yellen's statements on the USD exchange rate. The EU is preparing a plan to cast off dependence on the US.

Demand for the dollar decreased yesterday in anticipation of Janet Yellen's speech for her candidacy as minister. Many expect that she will take a different stance (on the dollar) than her predecessor Steven Mnuchin, who advocated a weaker exchange rate.

Markets await Yellen's statements on the USD exchange rate. The EU is preparing a plan to cast off dependence on the US.

Aside from that, many also anticipate her opinion on the $ 1.9 trillion aid package, which has already caused a number of dissatisfaction from the Republicans. It includes an increase in the minimum wage and a significant increase in family and medical leave, as well as funding for several other social programs protection.

In another note, yesterday, the Eurogroup met, during which the members announced their readiness to present a plan to strengthen the international role of the euro. In this way, the EU wants to get rid of the constant dominance and dependence on the US dollar, which will help protect the bloc from financial risks, including US sanctions. The one who initiated this move is former European Commission President Jean-Claude Juncker, who after several unsuccessful meetings with Donald Trump, called on EU leaders to take decisive steps to protect the economy and the European currency from volatility, since it was not possible to build a normal dialogue.

According to the European Central Bank, the euro remains the second most popular currency after the dollar. Despite this, there is little the EU can do (in terms of policy or legislation) to significantly increase the use of its currency.

Markets await Yellen's statements on the USD exchange rate. The EU is preparing a plan to cast off dependence on the US.

With regards to economic reports, Germany may publish weaker-than-expected data if COVID-19 incidence in the country does not decline soon. To add to that, Chancellor Angela Merkel announced tougher restrictions last week, as the overall mortality rate has jumped by more than 1,500. Merkel also intends to meet with regional leaders to discuss additional measures amid fears that a new strain of coronavirus, which has already been recorded in the EU, could lead to an infection spiraling out of control. The new restrictions may include a curfew, complete closures of all schools and cancellation of public transportation. This issue will be discussed at the meeting on January 20. Until that moment, the European currency will clearly remain under pressure against the US dollar.

In terms of economic recovery, the Bundesbank said a slowdown was observed during the second pandemic wave. At that time, the German government was forced to resort to a partial lockdown, but fortunately, it did not lead to a serious recession, and economic activity continued to recover. The more active growth in industry, construction and retail trade, which was observed until November last year, made it possible to compensate for the losses incurred by the lockdown. However, if these measures last longer than many expected, it will be impossible to get out of the recession quickly.

According to the latest data, Germany's GDP fell by 5% in 2020. At the same time, the inflation rate is to return to positive territory only in January of this year, mainly due to the introduction of new standards for CO2 emissions, as well as after the expiration of the VAT rate reduction period.

Markets await Yellen's statements on the USD exchange rate. The EU is preparing a plan to cast off dependence on the US.

Meanwhile, Italy recorded a decline in consumer prices for December, showing a drop of about 0.2% year on year. But excluding energy and food, core inflation accelerated to 0.6%.

As for EUR/USD, the dynamics did not change much in the market. There is a high chance that pressure on the euro will remain, at least until Wednesday, when Joe Biden is inaugurated. Big riots are expected in the US, so investors will not rush to buy risky assets. Aside from that, the upcoming ECB meeting is a deterrent for euro buyers. In this regard, only a break below 1.2065 could trigger a drop towards 1.2020 and 1.1980. But if the quote returns to 1.2140, EUR/USD may climb towards 1.2220 and 1.2280, and then go to 1.2350

GBP

Demand for the pound increased sharply on Monday, however, it is unlikely to seriously affect the sideways trend that has continued since the beginning of this year.

Aside from that, published reports indicate that house prices in the UK dropped by 0.9% this January, after falling by 0.6% in December. On an annualized basis, price eased 3.3% this month, after falling 6.6% last month.

Therefore, as shown in the charts, GBP/USD remained trading in a sideways channel. In particular, at 1.3480-1.3701. A break above 1.3611 will lead to a jump towards 1.3660 and 1.3705. But if the quote moves below 1.3570, the pound will drop to 1.3480 and 1.3370.

Analyst InstaForex
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