• EUR/USD is consolidating close to 1.2150, having fallen on Wednesday amid a USD recovery and ECB jawboning.
  • A barrage of Fedspeak and the latest Fed’s Beige Book did little to inspire price action.
  • Looking ahead, Biden’s stimulus plan announcement and Fed Chair Powell should give the pair more direction.

EUR/USD rallied as high as the 1.2220s during the early part of Wednesday’s European session, but since the pair hit its 21-day moving average at 1.2222, it has been broadly on the back foot, despite much stronger than expected Eurozone Industrial Production numbers for November that were released during the European morning. At present, the pair is trading close to 1.2150, down about 50 pips or 0.4% on the day. 

A broad recovery in the US dollar (the Dollar Index was supported at 90.00 and has recovered back to the 90.30s) is one factor behind the recent downside, though EUR is underperforming most of its G10 peers in wake of seemingly dovish ECB speak; ECB President Christine Lagarde and another ECB member both said on Wednesday morning that the bank was now going to be extremely attentive to the exchange rate, an upgrade in the language that they have in the past used to attempt to jawbone EUR lower against its major peers.

Note, however, that if the ECB isn’t willing to either significantly expand their QE operations or make further cuts to interest rates, which it doesn’t seem as though they are, there is little the bank can do to prevent further USD weakness fuelled EUR/USD appreciation. Perhaps their best hope is if the recent recovery in USD (that has seen DXY recover back above 90.00 from recent lows in the 89.20s) continues on its own accord, perhaps if US bond yields continue to rise.

EUR/USD saw momentary weakness when the leader of the Italia Viva Party announced that he would be pulling his ministers from the ruling coalition’s cabinet over disagreements about how to spend the incoming EU Recovery Fund money. The ruling coalition has now lost it’s majority in parliament and, while an election is still seen as unlikely, its possibility is rising, which could weigh on EUR via a widening in the EUR/USD cross.   

Elsewhere, a barrage of Fedspeak, as well as the release of the Fed’s latest Beige Book, did little to inspire price action or indeed fresh direction for the US dollar. Focus is on incoming US President Joe Biden’s stimulus plan announcement (reports citing leaked details of the plan suggest it will include generous child benefits) and a speech from Fed Chair Jerome Powell.

Fed Update

A number of FOMC members have been on the wires over the last few hours;

FOMC member Lael Brainard re-emphasised that the Fed’s new monetary policy framework approach avoids the need to tighten policy pre-emptively, something which could boost employment and the economy’s potential growth rate. Brainard said that the economy remains far away from the Fed’s goals and that while inflation might rise temporarily above 2% in the coming months, a sustained move above 2% would be needed in order to meet the Fed’s inflation goal. On the current hot Fed topic of if and when it might taper its asset purchase programme, Brainard said that she expects the current pace of asset purchases to remain appropriate for quite some time and reiterated that the Fed stands ready to increase the pace of purchases if needed.

Meanwhile, St. Louis Federal Reserve President James Bullard had some interesting comments; whilst he acknowledged that money supply has “exploded,” fiscal deficits are “off the charts” and a hot economy may either already be here or “just around the corner”, he reiterated that they won’t pre-emptively react to a rise in inflation by tightening policy as it needs to regain credibility on its inflation target.

Philadelphia Fed President Patrick Harker and FOMC Vice Chairman Richard Clarida also spoke, but both stuck to the usual Fed script and added nothing new.

Fed’s Beige Book

Elsewhere, the Fed’s latest Beige Book was released, containing insight from Fed industry contacts and what they saw in the US economy in the period leading up to 4 January (when the survey stopped collecting data).

In terms of the labour market; a majority of districts reported that employment had risen, although the pace of recovery was slow, and the recovery remained incomplete. Labour demand was strongest in the manufacturing, construction, and transportation sectors. Some employers noted staffing shortages and difficulty attracting qualified workers, especially for entry-level and on-site positions. These hiring difficulties were exacerbated by the recent resurgence in Covid-19 cases and resulting in workplace disruptions in some districts. Contacts in the leisure and hospitality sectors reported renewed employment cuts due to stricter containment measures.

In terms of wages; firms in most districts reported that wages increased modestly but generally remained weak. Employers in some districts reported raising wages or offering more generous benefits, such as year-end bonuses and flexible work arrangements, to limit employee turnover.

In terms of economic activity; most districts said that economic activity had increased modestly since the previous beige book period, but conditions remained varied. However, two districts reported little or no change in activity and another two others noted a decline. Manufacturing activity, meanwhile, continued to recover in almost all districts. Reports on consumer spending from fed districts were mixed. Meanwhile, residential real estate activity remained strong but weak conditions in commercial real estate persisted. Banking contacts saw little or no change in loan volumes. Finally, the prospect of vaccines bolstered business optimism for 2021 growth, though this was somewhat tempered by concern over the recent resurgence of the virus.

In terms of inflation; almost all districts saw modest price increases since the last report. Prices for construction and building materials, steel products, and shipping services were reported to have risen further. Contacts in several districts noted an improved ability to raise final selling prices to consumers and some contacts cited plans to increase selling prices in coming months. Meanwhile, energy prices picked up but remained below pre-pandemic levels and home prices continued to climb, driven by low inventories and rising construction costs. Finally, the growth in input prices continued to outpace finished goods and services.

EUR/USD key levels

 

La mayoría de los distritos de la Reserva Federal han informado que el empleo aumentó, aunque a un ritmo más lento, y han señalado que la recuperación sigue siendo incompleta, según ha mostrado el miércoles el Libro Beige de la Fed.

Comentarios adicionales resumidos por Reuters:

“Un número creciente de distritos informó una caída en los niveles de empleo en relación con el período de informe anterior”.

“La demanda laboral fue más fuerte en los sectores de manufactura, construcción y transporte”.

“La mayoría de los distritos de la Fed dijeron que la actividad económica aumentó modestamente desde el período anterior del Libro Beige, pero las condiciones siguieron variando”.

“Algunos empleadores señalan la escasez de personal y la dificultad para atraer trabajadores calificados”.

“Dos distritos informaron poco o ningún cambio en la actividad, mientras que otros dos notaron una disminución”.

“Las dificultades de contratación se vieron agravadas por el reciente resurgimiento de los casos de COVID-19 y las consiguientes interrupciones en el lugar de trabajo en algunos distritos”.

“Los contactos en los sectores del ocio y la hospitalidad informaron nuevos recortes de empleo debido a medidas de contención más estrictas”.

“Los informes sobre el gasto del consumidor de los distritos de la Fed fueron mixtos”.

“La actividad manufacturera continuó recuperándose en casi todos los distritos”.

“Las empresas de la mayoría de los distritos informaron que los salarios aumentaron moderadamente, pero en general se mantuvieron bajos”.

“La actividad inmobiliaria residencial se mantuvo fuerte; persistieron las débiles condiciones en el sector inmobiliario comercial”.

“Los empleadores de algunos distritos informaron que aumentaron los salarios u ofrecieron beneficios más generosos, como bonificaciones de fin de año y acuerdos laborales flexibles, para limitar la rotación de empleados”.

“Los contactos bancarios vieron pocos o ningún cambio en los volúmenes de préstamos”.

“Casi todos los distritos registraron aumentos modestos de precios desde el último informe”.

  • Gold is expected to reach at least a 38.2% Fibonacci of the sharp bearish impulse.  
  • US yields playing a role in the US dollar’s rebound.

The price of gold has started to stabilise and retrace a very sharp bearish impulse from the $1910/20 area. 

It has been a US dollar story for the most part which has driven the value of the precious metal lower, in a move sparked off by rising US yields. 

”Positioning data immediately following last week’s surprise Blue Sweep highlights just how little dry-powder gold bugs had remaining,” analysts at TD Securities explained. 

”CTAs are set to liquidate their gold length and target a net short position, which should weigh on the metal in the near-term,” the analysis added.

”This doesn’t bode well for gold flows, particularly given that gold is an inflation-hedge asset only inasmuch as the Fed’s stance on rates translates into a low rates vol environment.”

Meanwhile, from a technical perspective, gold is headed back towards a 38.2% Fibonacci retracement of the bearish impulse. 

$1,872 comes in as the 38.2% Fibonacci retracement level. 

Gold daily chart

DXY analysis

Meanwhile, the US dollar has just completed a W-formation.

The price has met a 50% mean reversion of the bullish impulse and would now be expected to extend the bullish correction from a confluence of the 21-day moving average, old resistance and the neckline of the W-formation.

Federal Reserve’s vice chair, Richard Clarida, has started that their models suggest overshooting inflation will help meet the 2% average target.

Last week, he was saying that he expects the Fed to keep its current $120 billion pace of bond purchases at least through this year.

“My economic outlook is consistent with keeping the current pace of purchases throughout the rest of this year,” Clarida said last week.

Market implications

The markets will be fixated on Joe Biden’s stimulus plan announcements on Thursday. 

Joe Biden hinted that he will go big on Thursday with a stimulus proposal worth ‘trillions’, and the market expects a focus on immediate relief ad a larger package that will come down the line. 

The combination of the Fed and government stimulus is expected to weigh on the dollar for the longer haul, although from a technical standpoint, there is a bullish case playing out. 

If the market has already baked in the fact of ongoing stimulus and lower rates, then the dollar has plenty of ground to correct. 

Brian Deese, quien encabezará el Consejo Económico Nacional de la Administración del presidente electo Joe Biden, ha dicho el miércoles que necesitan actuar rápidamente en el rescate y recuperación de la economía, según informa Reuters.

Comentarios adicionales:

“Necesitamos ofrecer una asistencia significativamente más directa a las familias y las empresas“.

No tenemos tiempo que perder en iniciar el proceso de inversión en nuestra recuperación”.

“Biden defenderá la acción inmediata de ayuda y señalará planes para el esfuerzo de reconstrucción a más largo plazo”.

“Necesitamos invertir para hacer que un esfuerzo de vacunación a nivel nacional funcione“.

“El riesgo de hacer muy poco supera el riesgo de hacer demasiado”.

“Biden cree que es apropiado terminar el trabajo con los cheques de 2.000$”.

“Se está trabajando en un conjunto de ideas que los demócratas y republicanos pueden apoyar“.

“Necesitamos tener una visión hacia la sostenibilidad fiscal, pero debemos reflejar las circunstancias actuales”.

“Hemos visto una reducción dramática en el coste de los préstamos”.

No realizar inversiones rápida y agresivamente en una crisis puede generar más cicatrices“.

“Es por eso que Biden está argumentando que necesitamos hacer estas inversiones hoy”.

  • USD/JPY comes with a bullish bias on the weekly and daily charts.
  • A daily extension could be on the cards on a break of weekly resistance. 

Bulls are stepping back in at key confluence areas on the weekly, daily and 4-hour time frames.

The following is a top-down analysis that illustrates that a monthly bullish correction would equate to a daily continuation of the price recovery from the weekly demand zone.

Monthly chart

A restest of the broken support, aka, new resistance, could be on the cards.

Weekly chart

The bulls are chipping away at the weekly dynamic resistance, with price supported at the structure. 

A clean break from here would fulfil a daily price continuation. 

Daily chart

The market has completed a W-formation and a pullback to the 50% mean reversion of the bullish impulse. 

This is a bullish scenario and a continuation to the resistance area is highly probable. 

4-hour chart

The 4-hour time frame offers an interesting scenario.

Below the corrective lows would negate the bullish outlook and W-formation prospects. 

However, should the market hold at this juncture, having met a 50% mean reversion level, a bullish impulse would be the makings of a W-formation. 

A W-formation would penetrate the near-term resistance and on a pullback to the W-formation’s neckline, or at least a 38.2% Fibo of the impulse, this is where a bullish opportunity would arise.

This will complete the next bullish impulse on the daily time frame.