Darkest Before Dawn

This includes the release of the preliminary January PMI figures at the end of the week. Japan is extending its national emergency to another five prefectures, which collectively account for over half of the nation’s GDP. Germany’s Merkel, not given to hyperbole, warns that the lockdown may last ten more weeks. The Dutch do not appear far behind. England is talking bot tightening its restrictions. Even China appears to be experiencing a flare-up. The pandemic is out of control in the US, although the curve appears to be flattening in some areas.

It was widely recognized that the virus and vaccine are going to dictate the economic story in 2021. The new variant of the virus is more contagious and the roll-out of the vaccine has been frustratingly slow in most countries. The recovery in Q3 seen among the high-income countries was a dramatic snapback but for many, it was not the beginning of a sustained recovery. That recovery may be several months away. The point is that the economic risks for the remaining Q4 20 data and for Q1 21, which just began, are on the downside.

If that is indeed the case, then why have bond yields risen? Is this another disconnect between Main Street and the House of Finance, like stocks rallying during the pandemic? It is darkest before dawn and whether it is four months or six months, the investors expect better news in the second half of the year. At the same time, there will be a new stimulus push in the US. The UK Chancellor of the Exchequer will have to extend aid as the lockdown is extended and intensified. It is likely Germany will have to, as well. Italy’s projected debt issuance is a third higher than it was a couple of weeks ago.

At least four Fed officials have said they could consider tapering before the end of the year. To be specific, the four are regional presidents, while the governors, including Powell and Clarida, have played this down. Currently, the Fed is buying $80 a month of Treasuries (about 55% have been notes of 4.5-years or less before maturing and about 13% in the 20-30 year bucket) and $40 bln a month in Agency mortgage-backed securities. No one is saying that tapering is imminent and a majority of officials that have spoken suggest it does not look particularly likely this year at all. That was also the thinking in last month’s primary dealer survey conducted by the Federal Reserve.

Yet if tapering is not the real culprit for the sharp rise in US yields this year, what is the driver? Where you begin your narrative points you in the direction of the answer, In one telling, the US 10-year yield has risen by around 45 bp since the election as investors discounted greater supply and became more committed to the reflation trade, which means higher real rates, and arguably a sensitivity for higher inflation. At the same time, the price of oil has surged.

The February WTI futures contract closed in October near $36.5. It approached $54 a barrel before profit-taking kicked-in ahead of the weekend. Recall that end of last January it was around $50.50. The deflationary thrust from oil prices has ended. Inflation expectations often track significant moves in oil prices.

Asian demand, including China’s apparent inventory accumulation, drove industrial metal prices higher at the end of last year. On the other hand, supply concerns following last week’s disappointing report on US plantings saw corn and soy prices rise to 6-7 year highs, and cotton traded at a two-year high. The CRB index has risen by over 22% since the end of October.

Even the coming Treasury supply may be exaggerated by partisans. The idea from both sides is that Biden will press ahead with the Democratic control of the legislative branch to push through the rest of the $3.2 trillion bill passed by the House of Representatives last year. However, we suspect it is more likely that Biden, judging from his disposition and that he learned from his experience with Obama, will avoid antagonizing the opposition and souring the relationship from the get-go. Instead, he is likely to find a compromise and make it bipartisan even if it results in a small package. In appointments and temperament, Biden is moderate.

Biden will be inaugurated on January 20. The day before, Yellen will speak at her confirmation hearings. In addition to broad economic issues, she will likely be asked about the dollar. As an economist, she recognizes that ideally one wants the currency to move in line with policy, otherwise it blunts or undermines it. At the Federal Reserve, she recognized that dollar policy is a Treasury remit. That makes it her call now.

The “strong dollar” mantra that existed before 2016 cannot simply be returned to now. A new formulation is needed to confirm that the US will not purposely seek to devalue the dollar to reduce its debt burden or for trade advantage. To signal a multilateral spirit, Yellen may be best served by reiterating the G7 and G20 stance that markets ought to determine exchange rates, that they should move in line with fundamentals, and avoid excess volatility. It does not have to be the final word, but as the first word, it would be reassuring.

Four G10 central banks meet in the coming days. The gamut of outcomes is likely, with the ECB, ironically, being the least perhaps the least interesting. Since it met on December 10, the pandemic has gotten worse and social restrictions and lockdowns have intensified and lengthened. The uncertainty of the US election and UK-EU trade negotiations has been resolved. Key hurdles to the EU’s budget and Recovery Fund were lifted.

The day before the last ECB meeting, the euro settled near $1.2080. It settled last week around $1.2150. March Brent was trading a little below $49 is rallied to almost $57.5 last week before consolidating. The 10-year German Bund yield has risen around 10 bp (to around minus 50 bp) and Italy’s premium has softened from almost 120 bp before the December meeting to almost 100 bp before widening again (115 bp) amid the political challenges in Rome. There is little for the ECB to do now.

The extension of the emergency in Japan to cover the area which generates more than half of the country’s output raises the downside risks. The central bank is likely to formally recognize this in one or two ways. It may shave its downgrade its qualitative assessment. It could also adjust its forecasts. In its last forecasts, issued in October, it anticipated the economy to contract 5.5% in the current fiscal year. Its previous forecast was for a 4.7% slump. The BOJ could also reduce the projection of growth for the next fiscal year, which was seen at 3.6%, up from 3.3% last July.

While peak monetary policy may generally be at hand, the Bank of Canada may be an exception. The overnight target rate sits at 25 bp. It is clear that officials do not want to adopt a negative rate, but Governor Macklem has suggested the lower bound for Canada maybe a little lower than where it is now but still above zero. Given the economic consequences of the spreading virus and some disappointing high-frequency data, the market (overnight index swaps) has a few basis points of easing discounted. It may not exactly be clear what a small rate cut achieves, but last year, the Bank of England and the Reserve Bank of Australia delivered small moves of 15 and 10 bp respectively.

Before this intensification of the virus, the Bank of Canada had seemed to be a candidate for an early exit from emergency policies. Now Norway’s Norges Bank appears at the front of the line. At its last meeting in the middle of December, the central bank brought forward its anticipated first hike to the first half of 2022. Since the December meeting, the high-frequency data points suggest that economic activity and prices are more resilient than feared.

The economy contracted by 0.9% in the three months through November. It was also half as bad as economists projecting. Underlying CPI, which adjusts for tax changes and excludes energy, rose by 3% year-over-year in December. The record drawdown from the sovereign wealth fund provided an early and strong fiscal cushion.

Two emerging market central banks of note meet as well next week. Turkey’s new central bank governor Agbal has made several steps that have given notice that there is a new economic regime. On Christmas Eve he delivered a 200 bp hike outstripping median forecasts for a 150 bp move. The one-week repo rate now stands at 17%. Inflation reached 14.6% last month.

Since the end of last October, the Turkish lira has been the strongest currency in the world, appreciating by about 13.4% against the US dollar. It is still off a little more than 19% since the end of 2019. Over the past three months, the yield on its 10-year dollar bond has fallen by about 105 bp to 5.60%. The market is signaling another rate hike is not needed.

The South African Reserve Bank can also stand pat, though for different reasons. SARB cannot afford to cut any further. Its repo rate is at 3.5% and December CPI stood at 3.2%. After cutting by 300 bp last year, the central bank held steady at the last two meetings of 2020. The implied policy path of SARB’s projections points to a rate hike in Q3 and Q4 this year., though we are a little skeptical that it can be delivered.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

Stimulus Doesn’t Always Stimulate – Pushing On A String

According to the dictionary,  stimulus is “a thing that rouses activity or energy in someone or something; a spur or incentive”.
Besides spur and incentive, other synonyms for stimulus are boost, impetus, prompt, provoke, etc.
Much discussion recently has centered on ‘stimulus’ checks to individual citizens and taxpayers. Within a nine-month period, two specific rounds of stimulus checks were issued.
The legislation that authorized the issuance of stimulus checks to individuals also included liberal increases in unemployment benefits and financial aid for small businesses.
The checks, increased unemployment benefits, and aid for small businesses are forms of financial stimulus; but, the legislation is referred to as an “economic stimulus package”.
The distinction between the terms financial and economic should not be overlooked.
The purpose of the financial incentives included in the legislation is to promote economic activity. It was a response to the horrendous decline in economic activity that was precipitated by the response to the Covid-19 pandemic.
Very literally, though, the financial incentives were an attempt to stave off economic collapse; or at least buy some time. This is true notwithstanding attempts by politicians of all stripes to justify the measures in more humane terms.

21st CENTURY – SLOW GROWTH, NO GROWTH

The first fifteen years of this century were spent in reverse and recovery modes. The trillions of dollars that have been created and spent were reactions to financial and economic catastrophe, which continue to increase in volatility.
Which brings us back to the title of this article. With artificial stimulants, such as certain drugs, there is an expectation of desirable positive effects from its use.
Over time, the positive effects of the stimulus become muted and lose their potency. It takes higher doses and more frequent use of the stimulus to create the same original results. Remember how long it took to bring the economy back to a level reasonably commensurate with its activity prior to the credit collapse in 2007-08?
Some were expecting an overwhelming inflationary surge due to the (at that time) historically large amounts of money and credit creation. Some even expected runaway inflation, but it did not happen.
Also, over time, the cumulative negative effects of the stimulus take their toll. For example, the Federal Reserve has been inflating the supply of money and credit intentionally for more than a century.
The cumulative negative effects of that intentional inflation have resulted in a loss of purchasing power for the US dollar of ninety-nine percent.
An excellent example of the declining effects of continued money and credit creation by the Fed is seen on the chart (source) below:

DEBT TO GDP RATIO HISTORICAL CHART

debt-to-gdp-ratio-historical-chart-2021-01-12-macrotrends

It is clear on the chart that each dollar of increasing debt provides for less and less economic output (GDP, Gross Domestic Product).  The results of debt stimulus for the economy have grown weaker and weaker since 1980.
Noteworthy is the fact that it now takes more than one dollar ($1.27 in October 2020) of debt to produce one dollar of GDP. Anything in excess of 100% (a 1:1 ratio Debt/GDP) is a losing effort; the losses are growing.

PUSHING ON A STRING

Sometime after the distribution of stimulus checks to individuals last April and since then, there has been a growing resistance to sending out additional stimulus checks. When the recent checks were authorized, the amount ($600) was significantly smaller than the first ($1200) checks.
Some of our representatives did not think that the first round of stimulus checks to individuals had their desired impact. It was hoped, and intended, that recipients would spend the money; but evidence indicated that much of it was held or saved.
The huge amounts of dollars and cheap credit gifted to us by the Federal Reserve and the US government seem more illustrative of emergency patchwork rather than stimulus. We should all hope it works as good as Flex Seal.

USD/CAD Daily Forecast – U.S. Dollar Rebounds Ahead Of The Weekend

USD/CAD Video 15.01.21.

Canadian Dollar Is Losing Ground Against U.S. Dollar

USD/CAD gained strong upside momentum while the U.S. dollar gained ground against a broad basket of currencies.

The U.S. Dollar Index managed to get above the resistance at 90.50 and tested the next resistance level at 90.70 but failed to develop sufficient upside momentum and pulled back towards 90.60. If the U.S. Dollar Index settles above 90.70, it will move towards the 50 EMA at 90.95 which will be bullish for USD/CAD.

Today, U.S. reported that Retail Sales declined by 0.7% month-over-month in December as the second wave of the virus put pressure on consumers.

Meanwhile, U.S. Industrial Production increased by 1.6% month-over-month in December compared to analyst consensus which called for growth of 0.5%. Manufacturing Production was also better than expected as it grew by 0.9% compared to analyst consensus of 0.5%.

Today, commodity-related currencies found themselves under pressure on foreign exchange market as oil and other commodities gained downside momentum. If this sell-off continues, Canadian dollar will move lower.

Technical Analysis

usd cad january 15 2021

USD to CAD made an attempt to settle above the resistance level at 1.2750 but pulled back towards 1.2720. If USD to CAD manages to stay above 1.2720, it will head towards the next resistance level at the 20 EMA at 1.2740.

A move above this level will push USD to CAD towards the resistance at 1.2750, so USD to CAD may face material resistance in the 1.2740 – 1.2750 area.

If USD to CAD manages to settle above the resistance at 1.2750, it will head towards the next resistance level which is located at 1.2775.

On the support side, the nearest support level for USD to CAD is located at 1.2700. If USD to CAD declines below this level, it will move towards the support at 1.2665. A successful test of this level will open the way to the test of the next support which is located near the recent lows at 1.2625.

From a big picture point of view, the current rebound is a major disappointment for USD to CAD bears as USD to CAD failed to settle below 1.2625 for the second time in January.

For a look at all of today’s economic events, check out our economic calendar.

USD/JPY Weekly Price Forecast – US Dollar Struggling at 104 JPY

The US dollar initially rallied during the course of the week to break above the ¥104 level, only to turn around and form a bit of a shooting star. Ultimately, this is a market that I think continues to struggle going higher, mainly due to the fact that there is a massive amount of stimulus out there that will continue to cause issues. After all, if there is going to be a flood of stimulus in the United States than people will start to step away from the in fact, one of the main reasons we did see a bit of a rally during the week was the fact that we started to see interest rates rise as people demanded more yield for US bonds. However, that becomes a short-term play, and it now looks as if those yields are starting to calm down a bit.

USD/JPY Video 18.01.20

Nonetheless, the shooting star of course is a negative sign and I think there is a significant amount of resistance to be found all the way to the ¥105 level. If we were to break above there, then obviously things would change quite drastically. Until then, I think that people will be looking to fade short-term rallies, and that is part of the problem with trading the weekly chart here. Quite frankly, a huge portion of the trade has already happened, so you probably need to drill down to at least the daily timeframe if not lower. Longer-term trading will be difficult for this market even though I think that it eventually goes looking towards the ¥101 level.

For a look at all of today’s economic events, check out our economic calendar.

GBP/USD Weekly Price Forecast – British Pound Digesting Gains

The British pound has gone back and forth during the course of the week, showing signs of exhaustion after a huge move to the upside. The market going back and forth makes quite a bit of sense after this massive move higher, as we have seen the 1.36 level offer resistance, just as the 1.35 level underneath acts as support. All things being equal, this is a market that needs to digest some of these gains for a while, which is typical after a huge move like we have seen. Nonetheless, the British pound is historically cheap, so that is worth paying attention to. I think ultimately, we will go higher but we may have a little bit of work to do in the short term.

GBP/USD Video 18.01.20

The market continues to try to price and stimulus coming from the United States, which will weigh upon the US dollar in general. In fact, that might be one of the bigger drivers of this market going forward, not necessarily the need for the British pound to be bought based upon strength. All things being equal, I think we are more than likely going to go towards the 1.50 level over the longer term as we normalize a bit in the United Kingdom. Remember, markets tend to look into the future, so eventually we will start to price in the United Kingdom after the pandemic and of course after the lockdowns and vaccinations. I do not have any interest in shorting this pair, at least not anytime soon. This is a market that seems to continue to look towards higher prices given enough time.

For a look at all of today’s economic events, check out our economic calendar.

GBP/JPY Weekly Price Forecast – British Pound Touches 200 week EMA

The British pound has gone back and forth during the course of the week, reaching towards the 200 week EMA, which has been important more than once, thereby it is not a huge surprise to see that we pulled back from there. At this point, the market continues to see the ¥140 level underneath as massive support, and therefore I think that if we pull back towards that area, we will see people continue to push this market to the upside. On the other hand, if we were to break above the top of the candlestick for this previous week, then the market could go towards the ¥145 level.

GBP/JPY Video 18.01.20

The market is trying to get back towards a more historic norm price, and therefore I think that we do eventually see this market going to the upside. The ¥150 level is probably the longer-term target, but that might be something that we are looking at towards the end of the year, assuming that we continue to see a reflation trade and of course that the United Kingdom turn things back around after the Brexit fiasco and of course the lockdowns. At this point, I think we will probably see a lot of noise in general, so keep in mind that your position size needs to be small enough to make it a reasonable trade to be involved in, but at this point I think you do get an opportunity to pick up value underneath and should look at pullbacks as a bit of a gap. I do not have any interest in trying to short this market, at least not until we were to break down below the ¥137 level.

For a look at all of today’s economic events, check out our economic calendar.

EUR/USD Weekly Price Forecast – Euro Gets Hammered

The Euro broke down a bit during the course of the week, as it may have gotten a bit too far ahead of itself based upon the parabolic nature of the trend. Regardless, this is a market that continues to see a lot of people trying to short the US dollar, but with interest rates spiking the way they have during the course of the week, that does favor the greenback. This might be a short-term phenomenon though, just due to the fact that so much stimulus is proposed. At this point, people start to sell the 10 year note in America, which drives up interest rates.

EUR/USD Video 18.01.20

To the downside, I think that the 1.20 level should offer a significant amount of support though, and this pullback is probably exactly what we need. After all, the 1.23 level above has been significant resistance extending all the way to the 1.25 level from what I can see. Ultimately, this is a market that I think will need to back up in order to break out above that level, which would take a significant amount of momentum. However, if we turn around a break down below the 1.19 level it could be rather ugly for the Euro going forward.

All things being equal, I suspect that we are simply going to go back and forth between these two levels as the market needs to work off some of the excess froth that had been part of the trend for so long. All things been equal though, I think that we will eventually have to make a longer-term decision. In the meantime, it is all about the interest rates going all over the place so volatility will continue to be a problem.

For a look at all of today’s economic events, check out our economic calendar.

AUD/USD Weekly Price Forecast – Australian Dollar Stalls at Big Figure

The Australian dollar has gone back and forth during the course of the last couple of weeks, showing a bit of hesitation. Ultimately, I think the biggest thing here is simply that the market has a lot of exhaustion coming into the marketplace, but I do think that gives us an opportunity to pick up value closer to the 0.75 handle. That of course is an area that should continue to be interesting due to the fact that it is not only a large, round, psychologically significant figure, but it was also the scene of a breakout. A pullback to that area will attract a lot of attention, and I would be all over that area if we see some type of supportive candlestick, perhaps even on the daily chart.

AUD/USD Video 18.01.20

To the upside, the 0.80 level would be a target, and of course would offer a lot of resistance as well, for the same reasons that the 0.75 level should offer support. When you look at historic charts, the 0.80 level has been an area of both support and resistance on even the monthly timeframe. I think at that point it is likely that we will continue to see a lot of value hunting due to the fact that we should see a significant amount of stimulus out there driving of commodities in value and demand, thereby pushing the Aussie higher. All things being equal, the market is likely to see plenty of value hunters out there just waiting to jump on board.

For a look at all of today’s economic events, check out our economic calendar.

EUR/USD Mid-Session Technical Analysis for January 15, 2021

The Euro is trading lower against the U.S. Dollar on Friday as weak demand for higher risk assets is helping to drive investors into the safety of the U.S. Dollar. This week’s weakness in the Euro is being blamed on rising coronavirus infections in Europe, which is limiting risk appetite.

France will tighten its COVID-19 border controls and bring its curfew forward by two hours, while German Chancellor Angela Merkel said she wanted “very fast action” to counter the spread of virus variants after Germany had a record number of deaths.

At 14:22 GMT, the EUR/USD is trading 1.2109, down 0.0045 or -0.37%.

In economic news, the Euro Zone’s trade surplus rose as expected in November despite an economic slowdown and falling trade turnover, mainly thanks to a better trade balance with Russia Turkey, Norway, Japan and South Korea, data showed on Friday.

The European Union’s statistics office Eurostat said the trade surplus of the 19 countries sharing the Euro with the rest of the world was 25.8 billion Euros in November, up from 20.2 billion a year earlier.

Daily EUR/USD

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart. A trade through 1.2025 will change the main trend to down. A move through 1.2349 will signal a resumption of the uptrend.

On the upside, resistance is a 50% level at 1.2187.

The short-term range is 1.1800 to 1.2349. Its 50% level at 1.2074 is a potential support level and trigger point for an acceleration to the downside.

Daily Swing Chart Technical Forecast

We’re looking for today’s early weakness to continue as long as the EUR/USD remains on the bearish side of the 50% level at 1.2187. If this creates enough downside pressure then look for the selling to possibly extend into the 50% level at 1.2074.

Look for a technical bounce on the first test of 1.2074, but be prepared for the start of a steep sell-off if this level fails as support.

Basically, we’re looking for an upside bias to develop on a trade over 1.2187 and the downside bias to escalate under 1.2074.

For a look at all of today’s economic events, check out our economic calendar.

USD/JPY Price Forecast – US Dollar Continues to Grind Sideways

The US dollar initially fell against the Japanese yen on Friday but then turned around to show signs of resiliency again. Quite frankly, this is a pair that does not seem like it has anywhere to be in the short term, and therefore I think you probably will do better off looking at other markets for trading opportunities. However, we are pressing the ¥104 level, an area that has been a bit difficult for the market to break above significantly for a while now, and of course we are sitting at roughly the 50 day EMA, which also has attracted a certain amount of attention. That being said, I think that if you can see signs of exhaustion on a short-term chart, you may have an argument for taking a trade to the downside.

USD/JPY Video 18.01.21

As far as buying the dollar against the yen is concerned, I do not really have any interest in doing so in the short term, but I do recognize that if we broke above the ¥105 level, and perhaps even the 200 day EMA which is just above there, then you might have an argument for a complete turnaround in the trend. We are at extreme lows, and quite frankly we have been lower before. In other words, I think the market is trying to figure out what to do next but with the massive amount of stimulus coming out the United States it could very well continue to weigh upon the greenback overall, and therefore continue the longer-term downtrend. As things stand now, if we do break down, we could go looking towards the ¥102.50 level.

For a look at all of today’s economic events, check out our economic calendar.

GBP/USD Price Forecast – British Pound Pulled Back Toward Support

The British pound has initially tried to rally during the trading session on Friday but turned around to show signs of weakness as we raced towards the support level underneath in the form of 1.36. This is an area that has been important more than once, extending down to the 1.35 handle. That being the case, the market is likely to continue to see a certain amount of buying pressure underneath, and I think it is only a matter of time before people start to take advantage of this market and its larger uptrend. Ultimately, I think that we go looking towards 1.3750 level in the short term, and then after that go looking towards the 1.40 level.

GBP/USD Video 18.01.21

Looking at the chart, the 50 day EMA sits underneath the 1.35 handle, and it looks as if it is trying to break above there rather soon. That should continue to offer a bit of dynamic support as longer-term traders tend to pay close attention to it as a potential trend defining indicator. All things being equal, this is all about the US dollar losing strength with massive amounts of stimulus expected, which of course has people concerned about the budgetary issues in the United States.

This pullback should be thought of as a potential “buy on the dips” type of situation, giving people the ability to pick up value as we go long. We have been in an uptrend for some time and it is worth noting that the British pound is historically cheap when looking back over the last several decades. Now the Brexit out of the way I believe that we will continue to see this move higher over the longer term.

For a look at all of today’s economic events, check out our economic calendar.

GBP/JPY Price Forecast – British Pound Pulls Back Against Yen

The British pound pulled back rather significantly against the Japanese yen during the trading session on Friday, perhaps taking a bit of a breather in what has been a very strong move to the upside. The ¥142.50 level was tested, and that we pulled back from it. I think at this point though, there are plenty of buyers underneath that will take advantage of a potential support level all the way down to the ¥140 level. That being the case, the market is likely to continue to see noisy behavior, which will be especially true in a pair like this.

GBP/JPY Video 18.01.21

Keep in mind that the pair does tend to be sensitive to risk appetite in general, so do not be surprised at all to see this go back and forth with stock markets and the like. Ultimately, this is a market that I think continues to be a “buy on the dips” type of scenario, as the British pound is still historically cheap, and therefore there should be a bit of a pushback towards the upside again, given enough time. The ¥140 level is an area that should attract a certain amount of attention, and therefore I would be very interested in buying this market down at that area on some type of bounce.

The 50 day EMA is approaching that level as well, so that of course can come into play as well. I have no interest in shorting this pair, at least not anytime soon but do recognize that the macroeconomic picture is a very fluid one at the moment.

For a look at all of today’s economic events, check out our economic calendar.

EUR/USD Price Forecast – Euro Reaching Towards 50 Day EMA

The Euro has initially tried to rally during the trading session on Friday but gave back the gains rather quickly. By doing so, it looks as if we are threatening not only the 1.21 handle, but also the 50 day EMA underneath. This is a general vicinity where we had seen a push higher as of late, and I think somewhere between there and the 1.20 level we will probably see people looking to buy they Euro “on the cheap” in that area as well, as stimulus in the United States is without a doubt the big driver of what we are seen with the greenback at the moment.

There are some questions as to whether or not Joe Biden can get a $1.9 trillion stimulus package through Congress, but one would think that the package will be large no matter what it ends up being.

EUR/USD Video 18.01.21

As we head into the weekend, it could be a little bit of profit-taking from the overall trend, or you could just look at it as a market that faces a significant amount of resistance near the 1.23 handle, and therefore needed to pull back in order to build up a little bit of momentum to make a serious charge at it. There is resistance between the 1.23 level and the 1.25 handle, and I think of it as a massive “zone of resistance” for the trend in general. I have no interest in shorting this pair, at least not until we break down below the 1.19 handle, which would probably open up the possibility of a move down towards the 200 day EMA.

For a look at all of today’s economic events, check out our economic calendar.

AUD/USD Price Forecast – AUD Continues to Build Case for Higher Prices

The Australian dollar has pulled back just a bit during the trading session on Friday but at this point in time it looks likely that we are ready to continue going higher. The 0.77 level is an area that has acted as a bit of a magnet as of late, after breaking above the 0.75 handle. When you look at the chart overall, you can see that the 50 day EMA sits just above the 0.75 handle, an area that of course is a large, round, psychologically significant figure. Short-term pullbacks will continue to be looked at as potential buying opportunities in the big scheme of things, as the market does tend to focus closely on these big figures.

AUD/USD Video 18.01.21

If you look at the recent action, you could make an argument for a bullish flag, which measures for a move towards the 0.80 level, possibly even the 0.81 level. With that being the case, I think it makes quite a bit of sense that we eventually get there from not only a technical analysis standpoint, but also the fact that commodities in general will continue to thrive in a world where there is massive amounts of stimulus coming from multiple countries. That being the case, I do like the idea of a longer-term “buy-and-hold” strategy, adding little bits and pieces along the way on short-term dips. I think that this is a cyclical change, at least for the foreseeable future, as the “reflation trade” is in full effect.

For a look at all of today’s economic events, check out our economic calendar.

Yearly Analysis: Will 2021 Be Better for Gold?

After a disastrous year of 2020, which brought about the COVID-19 pandemic , the Great Lockdown , and the economic crisis the question is what will 2021 be like – both for the U.S. economy and the gold market.

To provide an answer, below I analyze the most important economic trends for the year and their implications for the yellow metal.

  1. Society gains herd immunity by vaccination and the health crisis is overcome.
  2. With herd immunity approaching, the social fabric returns to normality, and the economy recovers.
  3. The vaccine rollout increases the risk appetite, reducing the safe-haven demand for both gold and the greenback .
  4. The return to normality and realization of the pent-up demand (comeback of spending that was put on hold during the U.S. epidemic ) accelerates the CPI inflation rate .
  5. The Fed stays accommodative, but the recovery in the GDP growth and the labor market makes the U.S. monetary policy less aggressively dovish than in 2020.
  6. However, the Fed continues to use all of its tools to support the economy in 2021 and, in particular, it does not hike the federal funds rate , even if inflation rises.
  7. As a result, the real interest rates stay at ultra-low levels. However, the potential for further declines, similar in scale to 2020, is limited, unless inflation jumps.
  8. The American fiscal policy also remains easy, although relative to 2020, government spending declines, while the budget deficit narrows as a share of the GDP.
  9. However, the public debt burdens continue to rise. Although the ratio of debt to GDP decreased in Q3 2020 amid the rebound in the GDP, it’s likely to increase further in the future, especially if Congress approves the new fiscal stimulus.
  10. Given the dovish Fed conducting a zero-interest rate policy , increasing debt burden, and strengthened risk appetite amid the vaccine rollout, the U.S. dollar weakens further. The American currency has already lost more than 11 percent against a broad basket of other currencies since its March peak.

What does this macroeconomic outlook imply for the gold prices? This is a great question, as some of the trends will be supportive for the yellow metal, while others might constitute headwinds, and some factors could theoretically be both positive and negative for the price of gold. For instance, the end of the recession seems to be bad for the yellow metal, but gold often shines during the very early phase of an economic recovery, especially if it is accompanied by reflation , i.e., a return of inflation.

The tailwinds include the continuation of easy monetary and fiscal policies . The federal debt will remain high, while the interest rates will stay low, supporting the gold prices, as was the case in the past (see the chart below).

There is also an upward risk of higher inflation. In such a macroeconomic environment, the U.S. dollar should weaken against other currencies, thus supporting gold prices . As a reminder, the relative strength of the greenback in recent years (see the chart below) limited the gains in the precious metals market.

However, there are also headwinds . You see, levels are significantly different concepts than changes. The latter often matter more for the markets. What do I mean? Well, although both monetary and fiscal policies will remain accommodative, they will be less accommodative than in 2020. Although the real interest rates should stay very low, they will not decline as much as last year (if at all).

In other words, the economy will normalize this year after suffering a deep downturn in 2020, so the economic policy will be less aggressive. Hence, the level of bond yields and the ratio of federal debt to GDP should stabilize somewhat – actually, thanks to the rebound in the GDP in the third quarter of 2020, the share of public indebtedness in the U.S. economy has decreased, as the chart below shows.

Hence, although the price of gold could be supported by the continuation of easy monetary and fiscal policies, low real interest rates, and weak dollar, it’s potential to rally could be limited. The accommodative stance of central banks and unwillingness to normalize the monetary policy for the coming years should prevent a significant bear market in gold , but without any fresh triggers of further declines in the bond yields or without the spark of inflation, the great bull market is also not very likely. So, unless we either see a serious solvency crisis or sovereign debt crisis , or an substantial acceleration in inflation, gold may enter a sideways trend . Or it can actually go south, if it smells the normalization of monetary policy or increases in the interest rates.

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter . Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care.

 

EUR/USD Bearish Zigzag Pattern Has Target at 1.20

The EUR/USD is breaching the 144 ema support zone. This indicates bearish pressure. A breakout could confirm the decline in wave C (pink). Let’s review the chart and wave patterns.

Price Charts and Technical Analysis

EUR/USD 15.01.2021 4 hour chart

The EUR/USD needs to push below the support trend line (green). This confirms the bearish break and ABC (pink) zigzag pattern (orange arrows).

The main target is located at the confluence of the -61.8% Fibonacci target and psychological round level at 1.20 (blue box).

A break above the resistance trend line (orange), however, indicates a bullish retracement first (green arrows). The main resistance zone is at the Fibonacci levels of wave B (pink).

The ABC pattern could complete a larger wave 4 (purple) of the uptrend.

On the 1 hour chart, a completed ABC (grey) pattern is visible within wave B (pink). The bearish price action is clear with lower lows and lower highs. The trend line (orange) is another confirmation.

But price action will need to push below support to start the breakout. Otherwise a counter trend retracement does linger as a danger.

EUR/USD 15.01.2021 1 hour chart

Good trading,

Chris Svorcik

For a look at all of today’s economic events, check out our economic calendar.

The analysis has been done with the indicators and template from the SWAT method (simple wave analysis and trading). For more daily technical and wave analysis and updates, sign-up to our newsletter

 

AUD/USD Daily Forecast – Australian Dollar Is Losing Ground Ahead Of The Weekend

AUD/USD Video 15.01.21.

U.S. Dollar Moves Higher Against Australian Dollar

AUD/USD did not manage to settle above the resistance at 0.7760 and is pulling back while the U.S. dollar is gaining ground against a broad basket of currencies.

The U.S. Dollar Index is currently trying to get to the test of the nearest resistance level at 90.50. If the U.S. Dollar Index manages to get above this level, it will move towards the next resistance at 90.70 which will be bearish for AUD/USD.

U.S. President-elect Joe Biden presented his $1.9 trillion stimulus plan on Thursday. Interestingly, the major stimulus plan did not provide any support to commodity-related currencies.

Today, foreign exchange market traders will focus on the economic data from the U.S. Analysts expect that Retail Sales remained unchanged on a month-over-month basis in December. It should be noted that a negative surprise is possible given the recent developments in the job market.

The latest Initial Jobless Claims report indicated that 965,000 Americans filed for unemployment benefits in a week as the second wave of the virus has started to put significant pressure on the economy.

However, the economy will soon get support from the new stimulus plan, and it remains to be seen whether safe-haven assets like the U.S. dollar will remain in demand in such circumstances.

Technical Analysis

aud usd january 15 2021

AUD/USD failed to settle above the resistance at 0.7760 and is currently trying to get below the nearest support level at 0.7740. RSI is in the moderate territory, and there is plenty of room to gain additional downside momentum.

In case AUD/USD manages to settle below the support at 0.7740, it will head towards the next support level at 0.7725. A successful test of this level will push AUD/USD towards the next support at the 20 EMA at 0.7700.

On the upside, the nearest resistance level for AUD/USD is located at 0.7760. If AUD/USD settles above this level, it will head towards the resistance at 0.7780. This resistance level has already been tested during the current trading session and proved its strength. A move above 0.7780 will open the way to the test of the resistance at 0.7800.

For a look at all of today’s economic events, check out our economic calendar.

U.S. Dollar Index (DX) Futures Technical Analysis – Strengthens Over 90.305, Weakens Under 89.945

The U.S. Dollar is inching higher against a basket of major currencies early Friday, rebounding from a near three-year low despite dovish comments from U.S. Federal Reserve Chair Jerome Powell the previous session and the announcement of President-elect Joe Biden’s monstrous fiscal stimulus plan Thursday evening. Both moves are potentially bearish for the greenback so the early strength is a bit of a surprise.

At 08:11 GMT, March U.S. Dollar Index futures are trading 90.300, up 0.085 or +0.09%.

Powell said in a live-streamed interview with a Princeton University professor on Thursday that the economy remains far from where the Fed wants it to be, and that he sees no reason to alter its highly accommodative stance “until the job is well and truly done.”

Meanwhile Biden released the details of his $1.9 trillion stimulus plan which failed to move the greenback very much in either direction.

On Friday, traders will get the opportunity to react to a slew of U.S. reports including retail sales, core PPI and consumer sentiment.

Daily March U.S. Dollar Index

Daily Swing Chart Technical Analysis

The main trend is down according to the daily swing chart, but momentum has been trending higher since the formation of the closing price reversal bottom on January 6 at 89.165.

A trade through 90.720 will change the main trend to up. A move through 89.165 will signal a resumption of the downtrend.

The minor trend is up. A trade through 89.890 will change the minor trend to down. This will shift momentum to the downside.

The first minor range is 90.720 to 89.890. The market is currently straddling its 50% level at 90.305.

The second minor range is 89.165 to 90.720. Its 50% level at 89.945 is support. This level stopped the selling on Wednesday at 89.890.

Daily Swing Chart Technical Forecast

The direction of the March U.S. Dollar Index on Friday is likely to be determined by trader reaction to 90.305.

Bullish Scenario

A sustained move over 90.305 will indicate the presence of buyers. If this move can create enough upside momentum then look for the rally to possibly extend into 90.720. Taking out this level will change the main trend to up and could trigger a surge into the resistance cluster at 90.950.

Bearish Scenario

A sustained move under 90.305 will signal the presence of sellers. This could trigger a break into 89.950 to 89.890.

If 89.890 fails then look for an acceleration into 89.165 of the near-term.

For a look at all of today’s economic events, check out our economic calendar.

EUR/USD Daily Forecast – Another Test Of The Support At 1.2130

EUR/USD Video 15.01.21.

Euro Remains Under Pressure

EUR/USD continues its attempts to settle below the nearest support level at 1.2130 while the U.S. dollar is gaining ground against a broad basket of currencies.

The U.S. Dollar Index managed to stay above the nearest support level at the 20 EMA at 90.20 and is moving towards the resistance at 90.50. A move above this level will push the U.S. Dollar Index towards the next resistance at 90.70 which will be bearish for EUR/USD.

Yesterday, U.S. President-elect Joe Biden proposed a new stimulus package which is worth $1.9 trillion and includes $1,400 stimulus checks. The foreign exchange market has mostly ignored the announcement as traders expected a stimulus package of this size.

Comments from the Fed Chair Jerome Powell drew more attention as he stated that the Fed was not ready to make any changes to its monthly bond purchases. U.S. Treasury yields pulled back after these comments, but declining yields did not hurt the U.S. dollar which continued its attempts to rebound against a broad basket of currencies.

Today, traders will have a chance to take a look at U.S. Retail Sales data for December which is expected to show that Retail Sales were unchanged on a month-over-month basis. Meanwhile, U.S. Industrial Production is projected to grow by 0.5% month-over-month while U.S. Manufacturing Production is also expected to increase by 0.5%.

Technical Analysis

eur usd january 15 2021

EUR/USD is currently trying to settle below the nearest support level at 1.2130. If this attempt is successful, EUR/USD will get to the test of the 50 EMA level which is located at 1.2120.

A move below the 50 EMA will push EUR/USD towards the next support at 1.2080. If EUR/USD declines below this level, it will head towards the support level at 1.2060.

On the upside, the nearest resistance level for EUR/USD is located at 1.2155. If EUR/USD gets above this level, it will head towards the resistance at 1.2175. A successful test of the resistance at 1.2175 will open the way to the test of the next resistance level which is located at the 20 EMA at 1.2195.

For a look at all of today’s economic events, check out our economic calendar.

GBP/USD Daily Forecast – Resistance At 1.3710 Stays Strong

GBP/USD Video 15.01.21.

British Pound Pulls Back Ahead Of The Weekend

GBP/USD faced strong resistance at 1.3710 and pulled back closer to the support at 1.3665 while the U.S. dollar gained some ground against a broad basket of currencies.

The U.S. Dollar Index received support at the 20 EMA at 90.20 and is slowly moving towards the resistance level at 90.50. If the U.S. Dollar Index gets to the test of the resistance at 90.50, GBP/USD will find itself under pressure.

Yesterday, U.S. President-elect Joe Biden proposed a stimulus package worth $1.9 trillion which included $1,400 stimulus checks. The foreign exchange market reacted calmly as previous reports suggested that the new stimulus aid would be in the $1.5 trillion – $2 trillion range.

The recent Initial Jobless Claims report highlighted the need for additional stimulus as 965,000 Americans filed for unemployment benefits in a week.

Today, traders will have a chance to take a look at Industrial Production and Manufacturing Production reports for November from the UK. Industrial production is expected to grow by 0.5% month-over-month while Manufacturing Production is projected to increase by 0.9%.

Later, traders’ focus will shift to Retail Sales data from the U.S. Accoring to the analyst consensus, Retail Sales remained unchanged in December. On a year-over-year basis, Retail Sales are forecasted to grow by 3.6%.

Technical Analysis

gbp usd january 15 2021

GBP/USD did not manage to settle above the resistance at 1.3710 and pulled back towards the nearest support level at 1.3665.

In case GBP/USD declines below the support at 1.3665, it will move towards the next support level at 1.3625. This support level has been tested several times in recent trading sessions and proved its strength.

If GBP/USD settles below 1.3625, it will continue its downside move and head towards the next support level at the 20 EMA at 1.3575.

On the upside, GBP/USD needs to get above the resistance at 1.3710 to continue its upside move. The next resistance level for GBP/USD is located at 1.3755. If GBP/USD manages to get above this level, it will head towards the resistance at 1.3785.

For a look at all of today’s economic events, check out our economic calendar.