Vaccination and US stimulus to be the main fundamental issues

A high number of high impact financial releases and central bank interest rate decisions tended to rock the markets in the past week. In the coming week, we may see the impact of financial releases easing somewhat and fundamentals taking the lead. Subjects such as the stimulus package for the US economy as well as the path of the pandemic and rate of vaccination could capture trader’s attention. As for financial releases we would highlight China’s and the US inflation measures for January on Wednesday as well as UK’s GDP rates for Q4 on Friday. Overall though, should the positive market sentiment continue to be present in the markets, we may see US stockmarkets reaching new highs. Its characteristic how oil prices were on the rise over the past few days due to expectations for a possible revival of economic activity worldwide

USD – Stimulus package eyed

Given that the uncertainty caused by the Robinhood retail traders in the past week has eased considerably, the market’s attention now turns to the efforts of the US Government to pass its fiscal stimulus bill through Congress. The casting vote of Vice President Kamala Harris was required as the Senate was split 50-50 on the vote, something setting the tone for what is to come. The US President is expected to meet with lawmakers of the House of Representatives today and could sway the markets keeping the effect also for the coming week. Fundamentally there seems to be a strong optimism guiding the markets boosting both the USD as well as the US stockmarkets. It’s interesting how the USD has transformed to a risk on currency as optimism for the US economy’s rebound is ongoing and the issue about how large the fiscal stimulus is and how fast it may come into effect, could continue to affect the markets in the coming week. In the US political stage, we could not miss out to note that the trial for the 2nd impeachment of President Trump is to begin next week, making lots of headlines. Should there be no surprises despite the issue being substantially interesting, we expect the market’s reaction not to be so intense given that the event shouldn’t affect the US economy’s course. On the monetary front we highlight Fed Chair Powell’s speech on Wednesday, yet a number of other speakers from the Fed are also scheduled to speak throughout the week. Also on a fundamental level, the news that Johnson and Johnson has applied to the FDA for emergency use authorization of its investigational single-shot COVID-19 vaccine candidate is good news. Should the vaccine be approved, it would help pick up the pace of the vaccination process in the US, as it is an additional medication and is of a single shot. As for financial releases, we would note the CPI rates for January on Wednesday, the weekly initial jobless claims figure on Thursday and on Friday the preliminary University of Michigan consumer sentiment for February.

GBP – GDP rates and vaccination rate to affect the pound

pound resisted the strengthening of the USD yet at the same time tended to get support also against the EUR, JPY and CHF in the past days. BoE’s interest rate decision seems to have lent a helping hand to GBP traders. The bank maintained its interest rates and QE program unchanged as was expected. The optimism of the bank was evident as despite stating that the current policy being appropriate and negative interest rates being available in the bank’s toolbox, the GDP is to recover quickly reaching pre-pandemic levels in the current year. It’s characteristic that BoE’s Governor Andrew Bailey stated that the “UK’s performance is nowhere near as adverse … as suggested by the headline numbers”. Also, on the monetary front, BoE Governor Bailey is to appear in the UK Parliament on Monday, which could create some volatility for the pound. In the coming week though the bank’s expectations are to be put to the test as the preliminary GDP rates for December and Q4 are to be released on Friday. On the same day also UK’s manufacturing output for December and trade balance figure for December could be of interest for GBP traders. At the same time, the ongoing vaccination process and the low number of new cases tends to increase hopes for a quicker return to some sort of normality. We expect the vaccination process in the UK to continue to affect the pound in the coming week as well as the overall path of the pandemic.

EUR – Wide uncertainty for the recovery of the economy

Despite today’s strengthening of the EUR against the USD we still have our doubts as the downward motion since the 29th of January, seems to be still ongoing. The slow vaccination process in Europe seems to weigh considerably on the common currency as it clouds the timing of its economic recovery. It’s characteristic that Germany is in turmoil about the issue as the strict lockdown measures are still ongoing for the coming wek as well. Please note how Germany’s retail sales growth rate plunged to the lowest point on record for December as a result of the lockdown measures. Hopefully the low number of new cases achieved in the past few days seem to provide the possibility for the lockdown measures to ease. Yet without vaccination being widely available, the Eurozone will have to wait in order to make solid claims for a possible economic recovery, which may take some time. On the positive side, a political crisis in Italy seems to have been prevented as Mario Draghi (former ECB President) accepted the mandate to form a new government. Whether he will be successful and with what consessions remains to be seen. On the monetary front we have our sights on Lagarde’s speech on Wednesday. While as for financial releases, we note on Monday Germany’s industrial output growth rate for December along with Eurozone’s Sentix index for February and on Tuesday Germany’s trade balance for December. On Wednesday we get Germany’s final HICP rate for January, which could confirm a revival of inflationery pressures in the largest economy of the area.

AUD – Losing the shine

The Aussie is about to end the week lower against the USD for a second week in the row. RBA’s interest rate decision, which kept rates unchanged yet expanded its QE program, along with some disappointment for the slowdown of economic activity expansion of China’s manufacturing sector, seems to have taken off some of AUD’s shine. In the coming week, we could see the Aussie be affected by the overall market sentiment getting support should optimism continue to characterise the markets and vice versa. Also on a fundamental level we tend to keep under a watchfull eye further developments in the US-Sino as well as the Australian-Sino relationships. Should tensions rise we may see the Aussie weakening. As for financial releases, we note the release of Australia’s Business conditions and confidence for January on Tuesday. On Wednesday we note Australia’s consumer sentiment for February as well as China’s inflation measures for January.

JPY-Safe haven flows to continue to move the Yen

JPY’s weakening against the USD seems to be ongoing in the past few days, given that the Japanese currency may have succumbed to USD’s strength. The positive market mood may have also caused some safe haven outflows for JPY, given that it weakened also against the GBP, while remained rather steady against the weak EUR. Overall we expect the market sentiment to continue to guide the Japanese currency and should optimism continue to characterise the markets, we may see JPY weakening further against the USD. Overall the retreat of JPY, may have brighten the days of some BoJ members as well as the Japanese government, as substantial worries were expressed at the end of January about its strengtheing. On the other hand, it should be noted that Japanese stockmarkets were on the rise in the past days, once again displaying the positive mood. Despite financial data usually failing to impress JPY traders, we would like to note on Monday Japan’s current account balance for December, while on Wednesday we get the corporate goods price growth rate for January.

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This information is not considered as investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.

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