Big Events This Week, What Does It Mean For FX?

The last full trading week for 2020 will be a busy one. There are four central bank meetings, December PMIs, employment, and consumer spending reports from many countries on the calendar. In fact, not even one major economy escapes the release of market-moving data. With that in mind, the main focus will still be on the US dollar. Investors continued to sell dollars on Monday, kicking off what could be the fourth straight week of losses. Low-interest rates, reserve diversification, and a global vaccine rollout are all reasons for the dollar’s decline. US stocks consolidated but its record-breaking moves this month reflects the shift into risk assets, which is consistent with the dollar losing its safe-haven bid.

10 and one 10 us dollar bill

Image Source: Unsplash

This week’s upcoming Federal Reserve meeting is another reason for the dollar’s decline. There’s a growing belief that after the central bank’s two-day meeting, they could increase asset purchases and lengthen the maturity of bonds they are willing to buy. The Fed may also to shift to outcomes-based guidance that would tie tightening to specific goals. Aside from these changes, Fed Chairman Powell’s tone along with adjustments to their economic projections will also affected. Changes in interest rates are not expected. For the central bank, the impact of vaccine rollout will be weighed against joblessness and we would not be surprised to see a tinge of optimism from Powell even as jobless claims are rising. The dollar is deeply oversold and it won’t take much for short covering. The dollar could see a lift from retail sales, which is also due for release a few hours before FOMC. Economists are looking for spending to fall but with wages rising and online spending hitting a record, the risk is to the upside. Last but certainly not least, everyone will also be watching stimulus talks.

The market’s appetite for US dollars will determine how many currencies trade but there’s enough global data for divergences to cause big moves for currency crosses. In addition to the US, the UK, Japan and Switzerland also have monetary policy announcements. Bank of Japan and Swiss National Bank meetings are typically not very market moving, but the Bank of England’s outlook could have a significant impact on how sterling trades. Thanks to the pledge by UK and EU officials to keep talks going beyond their prior deadline, GBP is the strongest currency on Monday. There’s still nothing definitive and the headlines could turn negative at any point, which is why the BoE will remain dovish. PMIs, Inflation, employment, and retail sales figures are also due from the UK making it an exceptionally busy week for sterling.

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