Risk sentiment bounced back a little overnight and this morning from Mondays sell off. With no fresh drivers, markets feel a bit directionless, and after the US holiday we are just recovering the risk off moves.
It feels like the market remains wary of risk sentiment in the short term with the virus situation deteriorating across most of the world. Once inaugurated Biden may have plans for tougher restrictions in the US which could weigh on risk sentiment in the short term. Also, vaccine roll outs are proving more difficult than expected and likely to take longer than initial estimates.
The Yellen testimony is due today. Much of what she will say has already been leaked. With regards to fiscal policy, she is expected to say: “But right now, with interest rates at historic lows, the smartest thing we can do is act big,” as she tries to sell Biden’s proposed $1.9tn stimulus package. She is also expected to reaffirm the US commitment to a market determined exchange rate for the dollar.
It is not yet clear when congress will vote on Biden’s proposed stimulus package. Biden and Harris will need to be sworn in on 20th Jan before Senate control passes over to the Democrats. Then Yellen, once confirmed, should be able to help push to get Biden’s relief package through.
Biden is expected to cancel the license of the Canadian Keystone XL oil project. The move is expected after Biden promised to do so during his campaign. Confirmation will be a blow to Alberta and likely to cost taxpayers over 1bn CAD.
Numbers to Watch
- AUDJPY and CADJPY both fully reversed their Monday moves, so fading the rally back in crossJPY here could make sense, particularly CADJPY. The BoC on Wednesday leaves risk for CAD skewed to the downside as nothing is priced but there is a small chance of a 10bps cut given weaker employment data. USDCAD also finding demand towards at 1.2720.
- Waiting for rallies to 0.8950 to fade in EURGBP leaving room to add at 0.9000. Still expecting UK to outperform EU given the speed of the vaccine roll out in UK but in the short term the risk off could lead to GBP position reduction. Also watch out for UK CPI on Wednesday as a weak print could reignite talk of negative rates at the BoE. 0.8863 still the level to watch on the downside.
- EURUSD – Risk-on sentiment is back once again amid expectations of additional fiscal stimulus weighing on the safe-haven dollar. A positive trading sentiment in the equity markets pushed the pair back to the 1.21 round-figure mark with 1.2130 as the next key resistance to keep an eye on. A break above that level will trigger strong upside momentum.
- GBPUSD – Risk-on mood along with US Dollar weakness pushed the Pound back above 1.36, as optimism over the rollout of COVID-19 vaccines assisted the pair and equities higher. Today, Treasury Secretary nominee Janet Yellen’s confirmation hearing will influence the USD price dynamics, and should the Cable take out the 1.3615 key resistance, the move will trigger a new wave of buying back to the 1.37 level.
- USDJPY – The dollar/ yen remains in neutral territory favouring higher highs as price keeps trading between 103.60 and 104.30 for now. The pair rallied higher this morning, following the recovery in US yields, renewing dollar’s demand against the yen. However, the US 10-year yields needs to break above 1.35 to trigger a breakout on the USDJPY above 104.30.
- FTSE 100 –The FTSE 100 is set to jump at the open on Tuesday ahead of a hearing with incoming US Treasury Secretary Janet Yellen, who is expected to tell lawmakers the US economy could suffer if they do not approve a big spending plan. Equities should maintain a favourable tailwind today but watch out for UK CPI tomorrow as a weak print could reignite talk of negative rates at the BoE.
- DOW JONES –Dow Jones futures are rising this morning amid bullish sentiment a day before President-elect Biden’s inauguration. Moreover, investors await Treasury Secretary nominee Janet Yellen’s comments on foreign-exchange policy as she is set to reinforce Biden’s $1.9 trillion stimulus narrative at hearings today, with the Wall Street Journal reporting that Yellen is expected to clarify that the U.S. doesn’t seek a weaker dollar. Technically speaking, the 30800 resistance has now turned to support again, as future contracts rose nearly 170 points reaching key resistance at 31000, with more upside expected in the absence of any other news today.
- DAX 30 –The German index is set to climb higher today, ahead of a hearing with incoming US Treasury Secretary Janet Yellen, who is expected to reinforce Biden’s $1.9 trillion stimulus narrative. In a very volatile session yesterday, the Dax hit our target at 13700 before bouncing back swiftly above 13800 and reaching the 200-period moving average at 13910. On the data front Germany’s ZEW publishes its latest survey of economic sentiment at 1000 GMT, a key factor is steering market direction today.
- GOLD – Gold traded in a tight range with thin volume yesterday between 1835 support and 1840 resistance levels as US markets were closed. Looking for a breach today in either direction for further clarity with 1825 as next support and 1850 as a key resistance level ahead of Janet Yellen’s testimony set to reaffirm the US commitment to let the market set the value of the dollar which theoretically should remove tail risk of a stronger dollar, adding to bearish sentiment for a weaker greenback.
- USOIL – WTI Crude held above the 200-period SMA on the hourly chart with the 50-period SMA to act as closest resistance during today’s session. An hourly close above it favours further upside with $52.60 and $53 as next resistance targets. The latest stronger than expected GDP data out of China along with expectations of further US stimulus is keeping oil prices well supported, however, a break of the 200-period SMA to the downside will trigger a bearish reversal.
Rony Nehme - Chief Market Analyst at SquaredFinancial
Rony has over twenty years of experience in financial planning and professional proprietary trading in the equity and currency markets. Prior to joining SquaredFinancial, Rony educated and coached numerous traders helping them find their edge and arming them with proven trading methodologies to successfully battle the markets. Rony obtained a B.S. in Finance from Concordia University in Montreal, and his professional designations include Certified Financial Planner CFP® obtained from the Canadian Securities Institute.