Stocks Cheer Biden Inauguration, FX Traders Look To ECB

The inauguration of the 46th President of the United States went off without a hitch. Equity and currency traders welcomed the new Administration with fresh records for the S&P 500 and Nasdaq. The peaceful transition allowed investors to turn their focus to President Biden’s 100-day agenda which includes aggressive promises for more stimulus and broader vaccine distribution – the two most important ingredients for a 2021 recovery. The greenback sold off against all of the major currencies with the exception of the euro and Swiss Franc because more spending and a larger fiscal deficit is bearish for the dollar.

U.S. dollar banknote with map

Image Source: Unsplash

Worries that the European Central Bank could jawbone the currency or talk of the need for more stimulus prevented the euro and the Swiss Franc from participating in the risk rally. No one expects the ECB to boost asset purchases, having just done so in December. When they last met, the central bank increased asset purchases by $500 billion and extended bond-buying to March 2022. They also lowered 2021 growth forecasts. Since then, new coronavirus strains and rising cases forced countries across their Eurozone to extend their lockdown. However, data hasn’t been terrible with industrial production, ZEW, and PMIs holding steady. Inflation on the other hand remains very low with HICP dropping to -0.3% on a year-over-year basis in December, far below their 2% forecast. Consumers, businesses, and investors are hopeful that with further vaccine distribution, they’ll round the corner.

The ECB will take all of this into consideration when they meet tomorrow. They will leave interest rates and their asset purchase program unchanged, they’ll talk about a strong post-COVID-19 recovery while expressing concerns about the impact of restrictions on near term economic growth. The big question is whether ECB President Lagarde will jawbone the euro. Last week, she said “we monitor very carefully the FX movements, don’t target it.” Some argue that Europe’s hope for better relations with the new Biden Administration will deter them from talking down the currency but we’re not sure if that impacts her decision. The strong euro is a problem but keeping the door open to more asset purchases if there’s further weakness could in many ways achieve the same goal of easing demand for the currency.

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