G10 FX Week Ahead: Driving The Deals Home For Christmas

Coins, Banknotes, Money, Currency, Finance, Cash

As markets wind down after a turbulent year, investors remain focused on whether politicians in Europe can drive a Brexit deal over the line and also whether Congress can avoid a government shutdown. We are biased towards progress on both and a continuation of this year's soft dollar environment.

USD: Avoiding shutdown

 

Spot

Week ahead bias Range next week 1 month target

DXY

89.8450

Mildly Bearish 89.2000 - 90.2000 88.0000
  • The dollar continues to drift lower, partly encouraged by the Federal Reserve’s recent re-iteration of its plans to keep the policy rate on the floor until 2024. Perhaps forward guidance is working after all. The near-term challenge to this benign dollar decline probably comes from Congress. Time has now run out on a stop-gap funding measure and Congress needs to vote quickly on a FY21 budget to avoid a prolonged government shutdown. Approval of both the FY21 budget and a $750-900bn stimulus package over coming days would be greeted warmly by investors and maintain the dollar’s soft tone.
  • US data this week sees December consumer confidence and November personal income and spending data. On the latter, the narrative is building around consumers digging into savings to finance consumption while income declines, but a rise in spending may raise some more doubts about the US consumer into the New Year. Overall, however, we suspect the dollar will continue to drift lower into year-end. 

EUR: EUR/USD trades through 1.20 and the sky didn’t fall in

 

Spot

Week ahead bias Range next week 1 month target

EUR/USD

1.2264

Mildly Bullish 1.2200 - 1.2360 1.2500
  • EUR/USD is heading into the final weeks of the year at its highs and the move above 1.20 has not elicited much, if any, response from the European Central Bank. Perhaps calming the ECB are issues such as: i) European equities continue to rise and ii) market-based expectations for eurozone inflation have not been priced lower. If topics such as the US stimulus/budget and Brexit can be resolved over coming days, we’d expect this powerful dollar bear trend to continue carrying EUR/USD towards its next major target of 1.25. 
  • In terms of local inputs in the week ahead, the scheduled calendar of European events is certainly thinning out quickly and we can perhaps only point to Tuesday’s release of December eurozone confidence (a small decline expected) as a clue to how much broadening lockdowns across Europe are dampening sentiment. Probably not enough to dent the euro. Additionally investors might greet the European Medical Agencies approval of the Pfizer/BioNtech vaccine this week and its rollout across Europe.

JPY: BoJ accepting a stronger yen

 

Spot

Week ahead bias Range next week 1 month target

USD/JPY

103.21

Mildly Bearish 102.50 - 104.00 102.00
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