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Fed minutes and NFP report to greet 2021

6 January 2021

The US dollar has started 2021 on the backfoot, but with several risk events lined up this week, can the battered currency regain some posture? The minutes of the Federal Reserve’s December meeting are expected to shed more light on the revamped forward guidance on Wednesday (19:00 GMT), while the latest jobs report on Friday (13:30 GMT) may reveal that employment growth stumbled in December. However, that’s not all investors will need to keep an eye on as several Fed policymakers are making their first remarks of the year this week, plus, happenings on Capitol Hill will also be keeping markets on edge.

Fed walking a fine line

Back in December, the Fed had the difficult task of walking a fine line as the recovery came under threat again from a resurgence of Covid-19 cases, but policymakers were wary of encouraging excessive risk taking by pumping yet more stimulus into the economy. Those hoping for an increase in asset purchases were disappointed, although investors seemed satisfied by the Fed’s pledge to keep interest rates near zero through 2023 and maintain asset purchases at the current pace of $120 billion per month until “substantial further progress has been made” towards achieving its employment and inflation goals.

Nevertheless, policymakers’ ambiguous language on the duration of the bond buying programme has left the door open to a possible scaling back of purchases sooner than what investors may currently be anticipating. Hence, the minutes will be dissected for clues as to whether the majority of FOMC members were leaning towards additional or less stimulus in the coming months.

One of the dilemmas for the Fed is that even if growth slows more than projected in the first few months of 2021, there’s little it can do that it hasn’t done already to bolster the economy before mass vaccinations expectedly begin to ease the economic hardship. However, Chair Powell appears to have done enough for now to convince markets that he won’t pull the plug before it is time to do so.

A slowing jobs market

With Fed policy set on autopilot, possibly for the rest of the year, the incoming data over the coming months are unlikely to be game changers and that includes Friday’s nonfarm payrolls report. The US labour market is expected to have added just 100k jobs in December, down from 245k in the previous month. The unemployment rate is forecast to have stayed unchanged at 6.7%, while average earnings probably rose by 4.4% year-on-year, the same pace as in November.

After the recent poor readings on consumption, a weak jobs report could raise fresh concerns about flagging consumer spending. However, now that Congress has finally approved the long-sought stimulus deal, household income is about to get a major boost, which means any negative reaction to bad jobs numbers is likely to be limited.

Growth optimism weighs on safe-haven dollar

If the optimism for the growth outlook for the US and the world holds, there will be little that can stand in the way of the dollar’s downtrend as the currency extends its long slide since March. Against the yen, the greenback just hit a 10-month trough of 102.69 before pulling back. If that low is breached, the next key support could come from the 102 level before the March dip to 101.17 comes into scope.

On the flipside, the recently congested area around 103.85 is the main obstacle that needs to be overcome for further advances, followed by the 50-day moving average just above the 104 level. However, for dollar/yen to establish a sustainable upward path, it would need to break above the descending trend line that’s been in place since March, which seems quite a stretch from where things stand now.

Can Georgia runoffs spark a risk-off episode?

Amidst the hope that the pandemic’s days are numbered, there are a few upside risks that could upset the dollar bears. One of them is that the Fed is not being transparent enough about how much inflation it is willing to tolerate before it decides to tighten policy. Any hints in the minutes that some policymakers are apprehensive about letting inflation run too high above the 2% target could send Treasury yields soaring, lifting the dollar.

But the biggest danger to spoiling the positive mood music is the Georgia runoffs for two Senate seats. The vote on Tuesday will decide who gets to control the Senate after a very tight race. If Republicans retain their majority, it will merely be a continuation of the status quo, whereas a double win for the Democrats is the preferred outcome for the markets as this would make it easier for the Biden administration to implement its spending plans. However, if the Democrats were to win only one seat, there could be permanent deadlock in Congress with both parties struggling to secure a majority on key legislations.


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