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Currency Market Analysis

Jan 18, 2021 | Currency Market Analysis

Global Themes

Data this morning revealed that China’s GDP jumped 6.5% in the final quarter of 2020, beating forecasts and propelling it above pre-pandemic growth rates. This means China was the only major economy to avoid contraction last year.

The world’s second largest economy is the beating heart of the global economy and so the positive news about the economic recovery in China would usually boost risk sentiment. The rebound in production should help buoy commodity prices, which in turn should help strengthen emerging currencies as these countries benefit from exporting raw materials. However, the rise in Covid-19 cases across Europe and the US, forcing stricter lockdown measures, will undoubtedly impact consumption and demand, limiting the growth outlook in the short term.

• Consequently, the optimistic data this morning has been overshadowed by the rising trajectory of the virus and the risk-correlated British Pound is suffering a weak start to the new trading week.

EUR

Several central banks hold monetary policy meetings this week, kicking off with the Bank of Canada (BOC) on Wednesday and the Bank of Japan (BOJ), Norway’s Norges Bank and the European Central Bank (ECB) on Thursday.

The escalating Covid-19 wave has taken its toll on countries worldwide. The economic impact has already proven devastating, but the longer nations remain in lockdown, the deeper the economic scars could be. For this reason, central banks and governments are expected to continue supporting where possible, making each policy meeting ultra-important and a possible key trading point in currency markets. The Euro staged a huge climb against the US Dollar last year adding to the deflationary pressures on European economies that have tipped back into recession. The ECB is expected to leave policy unchanged, but focus will be on forward guidance and the assessment of the economic recovery.

• GBP/EUR hit a new 2-month high just shy of €1.13 last week because of a weakening Euro. EUR/USD also extended its slide, signalling a possible end to the uptrend in the near term.

USD

The inauguration of Joe Biden as the 46th President of the US takes place this Wednesday, around 5pm UK time. It is usually a non-event for financial markets but with the growing possibility of unrest, unsettled investors may turn risk averse and seek out safe haven assets.

The recent rally in infrastructure and green energy stocks, coupled with commodities and riskier currencies strengthening, highlights investors’ expectations for increased spending in energy, renewables and other infrastructure. Mr Biden outlined a new fiscal package worth $1.9trn last week, which helped support market sentiment, though future corporation tax hikes could limit the spending spree of investors, weigh on stocks and possibly support demand for the US Dollar.

• All eyes will be on any further details of policy by Mr Biden, including trade policy with China. The spotlight may be stolen by potential violence though, which could fuel a short-term risk-off mood, supporting safe haven currencies like the Japanese Yen, Swiss Franc and US Dollar.


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