G10 FX Week Ahead: Pausing For A Breath

U.S. dollar banknote with map

We expect the dollar bear trend to take a breather in a week packed with risk events. Biden’s inauguration may be accompanied by civil unrest and Trump’s impeachment trial, the EUR may edge below 1.20 with the ECB meeting, EU summit and Italy’s political crisis in focus, while the BoJ, BoC and Norges Bank meetings should have limited FX impact.  

USD: A peaceful transition of power?

 

Spot

Week ahead bias Range next week 1 month target

DXY

90.4740

Mildly Bullish 90.0000 - 91.0000 90.0000

Washington will very much be the focus of the world’s attention this coming week as Joe Biden is inaugurated as the 46th US President on Wednesday. It would seem unlikely that we see a repeat of the civil unrest witnessed on Capitol Hill, but progress on impeachment proceedings may pre-occupy the Senate at a time when the US economy looks like it needs more support. Washington on Tuesday will also see Janet Yellen’s confirmation hearing as US Treasury Secretary. She may well be asked what she thinks about the dollar. Our best guess would be that she would reply along the lines of believing in a strong dollar policy, but exchange rates should be best set by the market. We doubt the dollar needs to rally much on these remarks. US data this week will focus on housing (doing well) and whether US initial claims show another unwelcome spike.   

In the background, we suspect the dollar bear trend needs some consolidation. The USD/Asia drop has slowed (helped partially by a weaker CNY fixing) and also by emerging complaints around the world over the pace of the dollar decline. Given flows into emerging markets have been a key driver of this benign dollar decline, China 4Q GDP (released early Monday) will also set the tone, as will any further signs of tighter monetary policy after a small liquidity drain by the People's Bank of China on Friday.

EUR: ECB and EU summit in focus

 

Spot

Week ahead bias Range next week 1 month target

EUR/USD

1.2120

Mildly Bearish 1.1980 - 1.2170 1.2200

European policymakers will take center stage this week – a week which sees meetings of both the ECB and EU leaders. On the former, little is expected of the ECB after December’s easing measures. However, we would expect President Lagarde to say that the ECB is ‘monitoring the exchange rate carefully’, wary of the euro’s impact on an already subdued inflation rate. The EU summit on Wednesday looks set to focus on the co-ordination of the vaccination roll-out and also the implementation of the EU Recovery Fund. On the subject of politics, Monday will also see the market review the results of the CDU leadership contest in Germany.

We’re also interested to see any conclusions reached by the European Commission in its report, released Wednesday, on improving the international role of the euro, e.g., on the subject of pricing energy in euros. This is a structural issue, will take some time, but will likely have strong support from those countries trying to find ways to extricate themselves from dollar dominance. Wrapping up, ongoing Italian political uncertainty and a steadier dollar could briefly see EUR/$ trade 1.1980.

JPY: BoJ set to stay dovish

 

Spot

Week ahead bias Range next week 1 month target

USD/JPY

103.70

Mildly Bearish 103.30 - 104.40 102.00

USD/JPY has recently been one of the major beneficiaries of the steeper US yield curve. It’s not clear that the US curve needs to steepen more next week – e.g., does the proposed $1.9 fiscal stimulus plan get pulled apart? – suggesting USD/JPY does not need to trade up through the 104.50 area. Our rates strategy team think that dovish Fed commentary and lighter supply may be sufficient to keep US Treasury yields stable around current levels.

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