• AUD/USD back below the 0.7750 mark on Wednesday, closing with losses of about 0.5%.
  • Focus will be on events stateside this week, with Biden unveiling stimulus plans, Fed Chair Powell and plenty of data.

AUD/USD came off the boil on Wednesday, closing FX trade with losses of about 0.5% or 40 pips and dropping back below the 0.7750 mark. The pair has been setting lower highs and higher lows since the start of 2021 and appears to be consolidating within a pennant structure that could be subject to a breakout.

To the downside, support comes in the form of an uptrend linking the 28 December high and the 4 and 11 January lows. A break below this trendline would open the door to a move towards the 21-day moving average at 0.7650, which also happens to coincide with the current 2021 low. Conversely, an upside break would likely lead to a challenge of last Friday’s 0.7800 high and perhaps the current 2021 high at 0.7820.

Aussie fundamentals

AUD has been for the most part focused on USD dynamics and global risk appetite. Hence, AUD/USD slipped on Wednesday in fitting with broad USD strength. That is likely to remain the case for the rest of the week, although AUD might also take some independent impetus from commodity prices (eyes will, as ever, be on the likes of oil, gold, copper and iron ore prices).

In terms of the key drivers for the rest of the week; AUD/USD will for the most part have its eyes stateside. Incoming US President Joe Biden unveils his fiscal stimulus plan on Thursday, on which day Fed Chair Jerome Powell also speaks. Eyes will also be on US data, including weekly jobless claims numbers on Thursday and December Retail Sales, December Industrial Production and January Michigan Consumer Sentiment numbers on Friday.

AUD/USD four hour chart

Reuters informa que “una mayoría de la Cámara de Representantes de Estados Unidos ha votado el miércoles para convertir a Donald Trump en el primer presidente de Estados Unidos en pasar por un juicio político dos veces, acusándolo formalmente de incitar a una insurrección, en una votación celebrada una semana después de los hechos violentos de sus partidarios en el Capitolio ”.

Here is what you need to know Monday, January 14th 2021:

  • The comeback in the US dollar has been the focus in the forex space for the start of the year. On Wednesday, the greenback resumed its rebound from near three-week lows.
  • Hopes of higher government spending by President-elect Joe Biden’s incoming administration and ongoing economic recovery from the coronavirus crisis as lead to a rise in US Treasury yields, supporting the greenback.
  • The greenback has also benefitted from expectations of a continued economic recovery in the United States while countries in Europe resort to lockdowns to fend off a second COVID-19 wave.
  • However, there was a temporary bump in the road on Wednesday for the greenback when US Treasury yields dipped on the back of the Treasury Department completing its final sale of $120 billion in coupon-bearing supply this week. Investors showed strong demand for long-dated bonds. Yields on the benchmark Treasury note slid to 1.071%. This is down from an almost 10-month high of 1.187% on Tuesday.
  • However, the rise in the 10-year Treasury yield above 1% has put a firmer floor under the mightily US dollar.
  • The  DXY was 0.37% higher at 90.359. The index has climbed 1.3% since falling to near a three-year low of 89.21 last week
  • In data, US December Consumer Price Index arrived were as expected. US December CPI was in line with expectations, rising 0.4% MoM, with core up 0.1% m/m. That left annual headline inflation at 1.4% YoY and core unchanged at 1.6% YoY. 
  • Comments from Fed speakers pushed back on the possibility of tapering bond purchases any time soon.
  • Richard Clarida, the Vice-Chair of the Federal Reserve System, said ”we are not going to hike until we actually get inflation to 2% and asset purchases are an important part of Fed strategy.’;
  • The S&P 500 was up 0.3%, the Euro Stoxx 50 was up 0.1% and the FTSE 100 was down 0.1%. WTI lost 0.6% to USD52.9/bbl. Gold was flat and unchanged around $1,857.3/oz.
  • Cryptocurrencies posted modest recoveries with BTC rallying to print a higher high in its steep correction of the 2021 pull back. 
  • Coming up, as the news that US President Trump’s impeachment was voted for by the House, US president-elect Joe Biden will reveal his stimulus plan on Thursday. Markets will be tuned in and time will tell as to whether the US dollar can withstand what is about to be unveiled. 

DXY technical analysis

  • It was a mixed, but broadly positive day for Wall Street with the S&P 500 closing with modest gains of about 0.2%.
  • Falling bond yields and further dovish tilting Fedspeak may have helped equities.
  • Equities await Biden’s stimulus plan and a speech from FOMC Chairman Jerome Powell on Thursday.

It was a mixed, but broadly positive day for Wall Street in the end; the S&P 500 closed with modest gains of about 0.2%, having again slipped briefly into the 3780 (in pre-market trade) and again pushed back to the north of the 3800 mark, though the index is still struggling to test its all-time highs set last Friday. Meanwhile, the Dow Jones Industrial Average was flat (still trade above 31,000) and the Nasdaq 100 index rose 0.6% but was just about unable to reclaim the 13000 level. The Russell 2000 (small-cap stocks) underperformed amid profit-taking after the index hit fresh all-time highs earlier in the week.  

No particular theme was behind the rise in equities; US bond yields fell and the curve flattened for a second day in a row (this could have helped equities). Putting pressure on yields and curve steepeners has been 1) strong demand for US debt at Tuesday’s 10-year and Wednesday’s 30-year auctions and 2) various Fed members sounding reluctant to be drawn into talking about the Fed winding down its QE programme any time soon (more on this from Fed Chair Jerome Powell on Thursday). Of course, dovish Fed commentary itself likely also helped stocks markets just as it pressured yields.

In terms of individual movers; chipmaker Intel (INTC) was up 7% after the company announced that it had replaced its CEO, Bob Swan, with VMWare’s CEO Pat Gelsinger amid activist pressure (VMWare’s stock price dropped 6.8%).

December inflation numbers showed headline inflation rising to 1.4% YoY, still well below the Fed’s 2% target, though inflation is expected to rise significantly in the months ahead (hence why markets were unreactive). Markets were also unreactive to the publishing of the Fed’s latest Beige Book, a summary of US economic health. A key point emphasised in the latest report was that “although the prospect of COVID-19 vaccines has bolstered business optimism for 2021 growth, this has been tempered by concern over the recent virus resurgence and the implications for near-term business conditions”.

What to watch this week

Impeachment theatrics will likely steal much of the headlines in the press until the end of the week but are unlikely to affect markets much. Indeed, the US House just voted to impeach the President, with the Democrat majority backed by a number of angry House Republicans. However, the Leader of the Senate Republican Minority Mitch McConnell has indicated that he will not consent to reconvene the Senate immediately, meaning that there is practically no chance that a vote on US President Donald Trump’s impeachment will be possible in the Senate before the end of his term in office.

That means impeachment will have to happen under the Biden administration, something which some fear might get in the way of/distract from the Biden administration’s legislative priorities, such as further Covid-19 aid. However, any delays ought not to be more than a few weeks which will matter little to the US economic outlook and thus ought not to matter too much to markets.

Much more important for the stock market for the rest of the week will be the incoming US President Joe Biden’s stimulus plan announcement on Thursday, as well as a speech by the Chairman of the Federal Reserve Jerome Powell. On the former, details leaked on Wednesday indicated the plan will include generous benefits for poor and middle-class families with children. On the latter, markets are on the lookout for what Powell says regarding the bank’s plans to eventually taper its asset purchase programme; as other Fed officials like Fed Vice Chairman Richard Clarida, he is likely to say something along the lines of it being far too soon to be thinking about tapering and that the current pace of purchases is likely to be appropriate at least through 2021. Meanwhile, earnings season kicks off on Friday with earnings from some of the big US banks.

US Senate Democrat Leader Chuck Schumer said that if the Senate impeaches outgoing US President Donald Trump then there will be a vote on permanently blocking him from running from office, reported Reuters.

This comes after the House voted in favour of starting impeachment proceedings on Wednesday. If Senate Republican Leader Mitch McConnell doesn’t agree to an emergency session of the Senate, the impeachment trial will begin after 19 January, said Schumer.

Market Impact

There has been minimal market impact to the news that Trump will be impeached for the second time during his term as President, but Marshall Gittler, head of investment research at BDSwiss Group, thinks that preventing Trump from running for office in future would “permanently remove the “Trump premium” from the dollar and allow the currency to weaken further.”

Johnson & Johnson’s one-dose Covid vaccine is safe and appears to generate a promising immune response in both young and elderly volunteers, according to early trial data.

The one-shot COVID vaccine, known as Ad26.COV2.S, is reportedly safe according to a Phase I and II study that shows the vaccine gives antibodies.

Market implications

Good news such as this will underpin the optimism for an economic recovery, supporting US stocks. 

Shares are up 1.7% in J&J on the news. 

 

Following the news that the House has voted to impeach the US President Donald Trump, US Senate Leader McConnell says best if congress spends the next 7 days on facilitating safe inauguration, orderly transfer of power.

Key comments

Says no chance a fair, serious impeachment trial of Trump could conclude before president-elect Biden is sworn in on Jan. 20.

Says Senate impeachment process will begin with the chamber’s first regular meeting following receipt of impeachment article from House.

Says even if the Senate began trial this week, no final verdict would be reached until after Trump left office.

Market implications

Markets are on the watch out for retaliation by Trump supporters in the form of protests. However, of far more interest, US President-elect, Joe Biden, will reveal his stimulus plan on Thursday. 

Technically, the US dollar is geared-up for an upside extension, contrary to the fact that the market is in anticipation of heavy stimulus fro the new Democratic White House. 

  • GBP/AUD has extended in an upside correction deep into resistance territory. 
  • A downside continuation from the W-formation’s neckline could be on the cards. 

Further to the prior analysis, GBP/AUD Price Analysis: Bears in control and seek break of 4-hour support structure, the bulls managed to escape the grip of the bears.

The price extended in the correction to a 61.8% Fibonacci retracement where resistance would now be expected to finally hold off the bulls. 

The following is a top-down analysis that offers a case for both the bulls and the bears, with a bias leaning towards the bears. 

Monthly chart

Weekly chart

Alternatively…

The market could continue to melt in a bearish extension following the recent retracement.

Daily chart

Downside continuation…

Reuters reports that ”a majority of the US House of Representatives voted on Wednesday to make Donald Trump the first US president ever to be impeached twice, formally charging him with inciting an insurrection in a vote held a week after a violent mob of his supporters besieged the Capitol.”

Market implications 

Markets will be watchful for retaliation and protests by Trump supporters over the coming days in the lead-up to the 20th Jan inauguration day. 

However, the vote will move to the Senate where Republicans still have majority.