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US stocks post new record high; Yellen, ECB in focus

21 January 2021

US stocks welcomed the latest occupant of the White House, President Joe Biden, by posting a new record high. For the S&P 500 that had hung around sheepishly around the 3800 mark for the past two weeks, the blue-chip index took another major stride towards the 3900 handle, led by stocks in the IT, communication services, and consumer discretionary sectors.

Although the futures contracts are pushing even higher at the time of writing, their 14-day relative strength index is once again teasing the 70 mark which denotes overbought conditions.

The overall outlook for US equities this year remains conducive for further gains, considering market expectations for more incoming US fiscal stimulus and the accommodative Fed stance. And with a new administration at the helm, fresh policies pertaining to the US health response to the pandemic may also hasten the recovery in the world’s largest economy.

Yellen be chillin’ on the Dollar

And the Washington watch doesn’t end with yesterday’s presidential inauguration - Janet Yellen’s confirmation as the new US Treasury Secretary could happen later today. Just earlier this week, Yellen conveyed perference to let markets decide the Greenback’s value. This is a marked shift from the weaker Dollar policies pursued by the Trump administration; neither did Yellen state a preference for the strong Dollar policies of the mid-90s.

Yellen’s stance may have given Dollar bears the green light to push the Greenback back into its downward channel, with many traders already crowding in on the Dollar shorts.

However, they must first wait for US yields to pare back recent gains, with the Fed’s meeting next week potentially serving as the next catalyst.

ECB to stand pat while major risks hang overhead

The European Central Bank is due to make a rate decision today, though policy settings are expected to be left untouched at this meeting as the central bank continues to digest near-term risks. Extended lockdowns, a slower-than-expected vaccine rollout, and political tensions out of Italy present major headwinds for the EU’s economic recovery.

Such concerns have also weighed on the Euro, which is posting a year-to-date decline against all of its G10 peers barring the Swedish Krona. Still, the bloc currency continues to trade around its highest levels against the US Dollar since 2018, while the trade-weighted Euro is close to its record high. A weaker Euro would enable the ECB to reach its post-pandemic inflation targets faster.

Coupled with Yellen’s relatively “hands-off” approach to the Dollar, the DXY’s performance may be heavily influenced by the Euro’s performance moving forward, considering that the shared currency accounts for 57.6 percent of the Dollar index.




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