Central Banks And Stimulus Bets Will Drive FX This Week

  • USD Slides as Stimulus Bets Gain Traction
  • Euro Shrugs Off Weaker German IP
  • New Highs in Stocks Drive AUD NZD Higher
  • GBP Hovers Near Strongest Level Since May 2018
  • CAD Holds onto Gains as Oil Hits 1 Year Highs

Chinese New Year is days away and for many investors, it is the most exciting event this week especially with a light economic calendar. It is not as big of a holiday as Christmas or New Year, but with more than 1.5 billion celebrants there will be less participation and possibly consolidation. Most of the major currencies traded higher on Monday as stocks hit fresh record highs. The improvement in risk appetite drove the US dollar lower across the board.

10 and one 10 us dollar bill

Image Source: Unsplash

3 things will drive currency movements this week – the direction of stocks (risk appetite), US stimulus headlines, and central banks. To be clear, there are no central bank meetings on the calendar but we’ll be hearing from the heads of nearly all of the major central banks. This includes Fed Chairman Powell, ECB President Lagarde, Bank of Canada Governor Lane, and Bank of England Governor Bailey – they are all scheduled to speak on Wednesday. Considering that most central bankers are optimistic about the recovery and worried about inflation, most of their comments will not pose a threat to current rallies. As new virus cases continue to slow optimism will grow, encouraging further gains in currencies.

All of this hinges on new fiscal stimulus from the US government. A path became clear on Friday when the Senate endorsed President Biden’s $1.9 billion trillion stimulus package after Vice President Harris cast the tie-breaking vote. The House should pass this relief package over the next two weeks and Biden hopes to have Senate approval and the final package signed by March 15. Although a higher minimum wage is off the table, a $1,400 stimulus check appears to be a done deal. As more positive stimulus news comes in, stocks should extend their gains. The dollar on the other hand should suffer as more spending leads to bigger deficits. USD/JPY rejected the 200-day SMA and could slide down to 104.50. The consumer price report is the most important piece of data on the US calendar this week but higher inflation won’t cause the Fed to budge.

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