• Gold futures market suffered for another week as the US dollar gained.
  • XAU/USD might revisit $1,800 if the short term support at $1,820 fails to hold in the coming week.

Gold experienced intense selling pressure in the concluded trading week. The precious metal was not able to pick up momentum following the consistent growth of the US dollar. Attempts to recover failed multiple times for the dollar-dominated asset. Meanwhile, the strongest currency in the world posted gains for the second week in a row.

The 4-hour chart also shows XAU/USD upside was limited by the 200 Simple Moving Average around $1,860. As selling activities surged, gold explored price levels toward $1,820. However, it closed the week at $1,825 amid a build-up of bearish pressure.

If technical levels remain the same on Monday, XAU/USD is likely to break under short term support at $1,820. The pessimistic outlook seems to have been validated by the Relative Strength Index. Moreover, sliding into the oversold region may continue to dampen recovery attempts and perhaps pave the way for losses eyeing $1,800.

XAU/USD 4-hour chart

XAU/USD 4-hour chart

It is worth taking note of the possibility for recovery if gold holds above $1,820. The reversal that comes into the picture could speed up price action toward $1,860.

Gold futures market will benefit significantly if the US dollar loses some of the gains accrued over the last two weeks. The expected Biden-stimulus for the United States citizens could also push inflation high, increasing demand for the precious metal.

  • US equity markets closed Friday in the red, the second day of losses in a row.
  • Friday saw quintessential risk-off trade; risk assets sold off and havens were bought on a variety of concerns.

US equity markets closed the final trading day of the week in the red, the second day of losses in a row. For the most part, however, equities did finish the session off lows; the S&P 500 dropped as low as 3750 shortly after the US cash open, but managed to recover and close closer to 3770, down 0.7% on the day.

The Nasdaq 100 saw similar price action, dropping to lows around 12,760 but managing to close just above the 12800 level and closing with losses of also 0.7%. The Dow Jones Industrial Average, meanwhile, saw slightly more modest losses, dropping 0.6%, while the Russell 2000 shed 1.5%. All major indices set new weekly lows on Friday.

Risk-off

Friday saw quintessential risk-off trade; stocks, crude oil, industrial metals and risk-sensitive FX all fell while safe-haven bond markets and safe-haven currencies all rose.

Many reasons were cited as contributing to Friday’s move…

Profit-taking with equities still residing at historically stretched valuations. A “sell the fact” market reaction after incoming US President Joe Biden’s $1.9T stimulus plan announcement.

Fear that Biden might attempt to raise corporate taxes sooner than expected after sounding hawkish on the need for American’s to pay their fair share.

Concerns regarding the Biden administration’s ability to actually get his stimulus plan, or at least substantial portions of it, through the Senate.

More bad US data, this time in the form of a much larger than expected drop in December retail sales volumes (which comes on the heels of bad weekly jobless claims numbers on Thursday and last week’s bad December NFP report).

Lockdowns in Europe (Italy announcing tougher restrictions and talk that Germany might be tightening soon as well), as well as European Pfizer vaccine delivery delays (as the pharma giant upgrades its European production facilities).

The outgoing Trump administration taking further parting shots at China with the Pentagon adding another nine Chinese companies to its blacklist (banning US investment in the companies).

Earnings

Pre-market earnings from three major US banks (JP Morgan, Wells Fargo and Citi) were in focus pre-market; JP Morgan (-1.9%) trades lower despite a strong earnings report, perhaps amid comments that it does not expect loan demand to rebound significantly in 2021. Citigroup (-6.3%) also trades in the read despite beating expectations in terms of EPS, perhaps due to disappointing revenue figures and a lower-than-expected share buy-back programme. Wells Fargo (-6.8%) also trades lower, after also posting disappointing revenue and signaling a lower-than-expected share buy-back programme. Earnings do not seem to have given broader equity markets much impetus to trade off of.

  • USD has been strongly supported on what has shaped up to be a very much risk-off Friday.
  • DXY has broken above a key downtrend and eyes a move towards 91.00.

USD has been strongly supported on what has shaped up to be a very much risk off final trading day of the week. Most G10/USD pairs have seen significant weakness, aside from CHF/USD and JPY/USD, given that the two currencies are also considered “safe havens”. Thus, the US Dollar Index (DXY) has rallied back to fresh highs on the week in the 90.70s and has broken above a key downtrend that, from a technical perspective anyway, opens the door to further upside towards the psychological 91.00 level and the index’s 50-day moving average just above it at 91.063.

Start of new period of USD strength, or dead cat bounce?

Though President-elect Joe Biden is unlikely able to get the entirety of his $1.9T stimulus package through opposition in the Senate (60 Senators will need to vote in favour of the package in its current form in order to avoid a filibuster), further stimulus is undoubtedly on the way (a simpler, smaller package will only require a simple majority, which the Democrats already have.

The debate that has been raging ever since the Democrats clinched that all-important majority in the Senate back on 6 January has been what impact will this have on the US dollar. So far, the bulls have been winning the argument.

In anticipation of further economy-boosting stimulus, which will require a lot of new debt issuance, nominal US bond yields have moved significantly higher over the last 10 days and though the move higher in real yields has been much less (much of the upside in nominal yields is a result of higher inflation expectations), this has still been taken as a USD positive.

Market participants, who were for the most part very short USD heading into 2021 seem to at the very least be taking profits on these shorts, even if they are not sold on going outright long USD just yet.

An area of significant medium-term resistance looms to the upside above the 91.00 mark. If the USD bulls can push the index through this area, this will send a signal that this turn around in the US dollar’s fortunes is “for real”. Failure might open the door for another prolonged period of downside.

Fundamentally speaking, most market commentators, for now, retain their long-term downwards bias on USD for a few reasons summarised below:

1) Amid growing speculation that more US fiscal stimulus will drive a much faster than previously thought US recovery (not to mention a faster rebound in inflation), Fed Chair Jerome Powell and the majority of other FOMC members that have spoken recently have been eager to reassure markets that the Fed will, as it has been saying it would do all along, maintain highly accommodative policy for the foreseeable future. Reducing asset purchases will be the Fed’s first means of withdrawing stimulus and markets were starting to bet that this could happen as soon as 2021, but Powell and others pushed back against this notion, saying it was far to soon to even be talking about it. The risk that the Fed surprises the market in just how dovish it stays in the face of a surge in economic activity and prices later in the year could deal the US dollar some damage.

2) 2021 ought to be a great year for risk appetite given expectations that mass Covid-19 vaccinations will facilitate an aggressive economic rebound later in the year. This ought to be great for stocks, industrial commodities and energy, emerging market assets and more risk-sensitive currencies. All of this will typically come at the expense of the safe-haven US dollar.

3) Further US fiscal stimulus will not only be deficit-financed (worsening the US government’s fiscal position, a typical USD negative), but is likely to worsen the US trade deficit, which is itself a structural USD negative (more Americans selling USD to buy foreign goods than foreigners buying USD to buy American goods). Higher debt-financed consumption of goods and services in the US will not automatically boost US production of goods and services and, inevitably, a large portion of this consumption will have to draw on production that happens abroad.

DXY eyeing further gains

For a technical perspective, things are looking bullish for the DXY right now. The index just broke above a key downtrend linking the 7, 9, 21 December and 11 January highs (breaking this level roughly when it moved above the 90.60s) and has since retraced to retest this level, which successfully acted as support and now the index is back at highs of the day in the 90.70s. The door has been opened, technically speaking, for a move towards the psychological 91.00 level and the December 21 high and 50-day moving average just above it. Early December highs around 91.20 will also be worth watching.

DXY four hour chart

  • EUR/GBP is a little higher on the final trading day of the week, amid what appears to be mild profit-taking.
  • The pair rebounded from significant support just above 0.8850.
  • Both EUR and GBP much more focused on global risk appetite and US dollar dynamics as opposed to domestic themes.

EUR/GBP is a little higher on the final trading day of the week, amid what appears to be mild profit taking by those who made money this week from shorting the pair from above 0.9000. The pair, which hit a key long-term area of resistance just above 0.8850 on Thursday and again during early European trade on Friday briefly crossed back to the north of the 0.8900 level and now trades around 0.8890. At present, the pair trades with modest gains of just over 0.1%.

Eurozone troubles

Both EUR and GBP much more focused on global risk appetite and US dollar dynamics as opposed to domestic themes. Indeed, though it did seem to weigh on European stock markets, news that Italy (and likely soon Germany too) is tightening lockdown restriction did little to dent EUR sentiment versus any of its non-safe haven peers.

Moreover, the ongoing Italian government “crisis”, as well as a new government crisis in the Netherlands (the government just resigned over a child-subsidy scandal), seem not to be affecting EUR too badly versus its non-safe haven peers.

Markets maintain the confidence that the continent will soon (as in, by H2 2021) achieve herd immunity to Covid-19, meaning lockdowns will be a thing of the past and as long as these governmental crises don’t give rise to any more anti-EU national leaders, then market ought not to worry too much over a little turbulence.

UK fundamentals

Though a little lower on the day versus EUR, GBP retains its spot as this week’s best G10 FX performer. GBP has been emboldened by the UK’s progress with its mass vaccination programme, which is well ahead of most of its developed market peers. Reports last night suggest that the country is going to attempt to ramp up daily vaccinations to 500K per day, with vaccines potentially set to be administered 24/7. This means all over the 50s might be able to be vaccinated by the end of March.

Meanwhile, the currency has also received tailwinds from a repricing of money market expectations for BoE negative interest rate policy (NIRP) in 2021 and beyond; after comments from BoE Governor Andrew Bailey earlier in the week, who did not sound overly enamored with NIRP at all, markets downgraded their bets for further rate cuts in the coming months, supporting sterling.

EUR/GBP daily chart

President-elect Joe Biden’s proposed stimulus is big but appropriate, Boston Federal Reserve President Eric Rosengren said on Friday, as reported by Reuters.

Additional takeaways

“We need to do more to support the economy.”

“Expecting to have a tighter policy as we get closer to full employment.”

“We are pretty far from that time.”

Mix on fiscal and monetary policy right now is appropriate.”

“The main problem with the economy now is that we have the wrong pandemic policy.”

“Economic forecasting between now and September is based on how fast vaccines are rolled out.”

“Next 6 months slower growth is expected because of challenges in inoculating.”

“Expecting to see a very strong second half of the year.”

Market reaction

US Dollar Index preserves its bullish momentum after these comments and was last seen gaining 0.52% on the day at 90.70.