While most central banks continue to run NIRP or ZIRP monetary policies (both negative and zero interest rate policies) to navigate the ravages of the pandemic, national currency values mightn’t diverge by significant amounts over the coming months.

Therefore, traders must contend with the major currency pairs oscillating in tight daily ranges over the short term until a clear policy direction becomes apparent.

The dollar index DXY has risen by approximately 0.20% so far in 2021. It’s trading close to the 90.00 level handle often considered a critical psyche level at which many market orders become clustered.

At the time of writing, 9:00 am UK time Friday, January 22 EUR/USD is down -0.31% year-to-date while GBP/USD is up 0.03%. USD/JPY is up 0.36%, and USD/CHF is down -0.07%. Versus the Aussie, the US dollar is up 0.35% and versus the Kiwi down -0.03%.

Now the Trump administration has departed the White House, forex, equity and commodity traders can look forward to a time when tweets don’t move markets. During the unnecessary tariff wars and impasse with China, there was a period when Trump’s random thoughts (delivered through the social media platform) caused markets to whipsaw and occasionally crash into bear-market territory.

Joe Biden’s administration has wasted no time reversing many of Trump’s divisive polices. In a flurry of activity, Biden has issued executive orders to manage the response to COVID-19 and restore relations with other countries. He’s re-joining the Paris accord climate change initiative, stopping building the Mexico/USA wall, giving immigrants status, and reaching out to Iran and possibly Venezuela.

This calm management style will directly affect financial markets due to the USA position as the globe’s largest economy. The SPX 500 was up 4.03% monthly and the NASDAQ 100 up 5.52% as of Friday morning.

There are signs already that financial markets are reacting to fundamentals listed on the economic calendar over recent weeks. For example, the reported earnings of Netflix caused the equity price to rise by over 12%. The streaming service has enjoyed spectacular subscriber growth during the pandemic. Traders are also paying attention to interest rate decisions, monetary policy announcements, and unemployment numbers.

Structural unemployment is arguably the most prominent domestic challenge the Biden administration faces. It’s tricky to untangle the data to get the realistic unemployment numbers. Some agencies put the total at 18 million, and others suggest closer to 25 million when you factor in those loosely attached to the workforce and the self-employed who’ve lost their business and income. Whatever metric used the fact remains that before the pandemic the official unemployment total figure was closer to 5-6 million.

The energy required for people to bend down, pick up the broken sticks and start to rebuild their shattered lives and businesses represents a massive challenge. While equity markets continue to print record highs, the real economy is still on a respirator. There is no financial market trickle-down, which is why the $1.9 trillion Biden stimulus needs to directly help lower-paid families and households ASAP.

The COVID-19 virus second/third wave has hit Europe hard. In the UK the pandemic is running amok, on Wednesday the UK recorded 1,820 daily deaths and headed for 10,000 in a week, the worst metrics since the pandemic began in February-March 2020. Germany, previously admired for its control and containment of the virus, has suffered recent death rates per day of over 1,000.

The pandemic’s impact on European economies over recent months has been severe. On Friday the UK’s retail sales figures came in below expectations; 0.3% growth in December with a 2020 fall of approximately -1.5%, the worst statistics since retail figures first became recorded back in 1993.

Combined with that collapse, the latest flash IHS Markit services metric for the UK in January was shocking. Reuters forecast a reading of 45.1, but the actual number came in at 38.8. The composite measure came in at 40.6, significantly below the 50 levels separating contraction from growth.

Retail and services are the pillars supporting the UK economy, and such disappointing figures illustrate the massive rebuilding challenge facing the UK government. Short term the UK is inevitably heading for a catastrophic double-dip recession and while Brexit has disappeared as a topic from mainstream news, its impact is just beginning to affect trade.

Sterling reacted severely to the Markit PMIs, GBP/USD fell through S1 and was trading down -0.53% at 11:00 am UK time. The euro responded more favourably to Eurozone PMIs which were closer to (or beat) the forecasts. EUR/USD recovered to trade close to flat, while EUR/GBP traded up 0.51% threatening to breach R3.

Next week’s medium to high impact calendar events

Monday is a relatively quiet day for medium to high impact news. The Ifo business climate index for Germany gets released, and the forecast is a fall from 92.1 to 91.8, a fall that could impact the value of EUR versus its currency peers.

On Tuesday, the UK’s ONS publishes its latest employment and unemployment data. The forecast is for a loss of 160K jobs in October, and a rise in the unemployment rate to 5.1%. The claimant count should increase by 86.3K for December 2020. However, these small changes flatter the devastation COVID-19 has had on UK society.

The furlough scheme (extended until April 2021) prevents a cataclysmic loss of jobs. Nine million are on the plan, and estimates suggest 30% of employees would be redundant without the support, and four million businesses could be zombies without any chance of survival. If the employment/unemployment figures miss forecasts, GBP could come under pressure.

In the afternoon, the latest Case-Shiller house price index will get published. The forecast is 8.4% annual growth, a stunning figure considering the pandemic backdrop. The Confederation Board consumer confidence reading in the US is forecast to come in at 88 for January.

The main calendar events for Wednesday include the latest inflation data for Australia. AUD could react in the Sydney/Asian trading sessions if the figure misses or beats the forecasts by any distance. Durable goods orders (excluding transport) in the USA for December are forecast to show a modest improvement to 0.6%.

Later in the evening, USD may experience volatility when the Federal Reserve announces its interest rate decision, and the critical rate should remain at 0.25%. Analysts and traders will then focus on the Fed chair Jerome Powell’s press conference to establish if the highly accommodative monetary policy is under review.

The USA’s Thursday weekly jobless claims are likely to continue their grim trajectory. The prediction is an extra 951K weekly claims. Unless an improvement in unemployment emerges, it’s impossible to predict when the USA economy and society is in a sustained period of returned growth.

This latest figure could affect the value of USD against its peers. The December new home sales are reported later in the New York session, and the forecast is an increase to 2.9%, a bounce back from November.

Early Friday morning a series of Japanese data are published including the latest unemployment figures and industrial production. Both metrics could reveal a slight deterioration which could affect the value of JPY versus its peers.

In the London-European sessions, the latest German unemployment figures get published as does the Q4 2020 GDP measurement. Unemployment is forecast to remain unchanged at 6.1%, with Q4 GDP crashing to -1.2% and the year-on-year figure worsening to -4.6%, representing the worst reading since the Great Recession years. In the afternoon before and during the New York session, various agencies’ data for the USA economy gets published. Personal spending, personal income, wages, home sales, and the Michigan surveys will illustrate any general weaknesses or strengths in the USA economy.

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