Dollar Bounces As Market Waits For Stimulus Deal

It has been a challenging week for the US dollar. The greenback fell to fresh 2.5 year lows against most of the major currencies but as the week drew to a close, it finally rebounded. While some may hope that this marks a bottom for the dollar, there’s scope for further losses in the coming week. Vaccine progress and the prospect of a stimulus deal are some of the main reasons for the dollar’s weakness and that is not expected to change. Stimulus talks are progressing and there’s talk that an agreement may be reached over the weekend. While it falls significantly short of the support offered in March, it would provide millions of Americans with much-needed relief. Moderna is on track to have their vaccine approved by the Food and Drug Administration, making it the second vaccine available to the American public – this could happen as early as Monday. So the rally in equities next week could be renewed by the combination of positive stimulus and vaccine news. If that happens, the greenback could see fresh losses.

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No US economic reports were released on Friday but outside of housing, US data has mostly surprised to the downside. Next week revisions to Q3 GDP, personal income, personal spending, existing and new home sales are due for release. Housing data should hold steady but income and spending should be softer. With that said, the primary driver of dollar flows will be year-end position adjustments, stimulus, and vaccine news. Short covering after a strong move this year is one of the few reasons why the dollar could extend its recovery in the coming days.

Euro snapped a four-day rise despite another piece of better than expected data. The German IFO business climate index rose to 92.1 from 90.9 with improvements in both the current conditions and expectation components. Throughout this month we’ve seen consistent upside surprises in Eurozone data that justifies the currency’s rally. Thus far, the impact of nationwide lockdowns have been limited and while there’s still risk of weak data in December, for the time being, economists (us included) underestimated the region’s resilience. With no major Eurozone economic reports scheduled for release next week, the market’s appetite for US dollars will be the primary driver of EUR/USD flows.

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