Cooling of market sentiment helps the dollar (Daily analysis 18.01.2021)

Monday is a day off for US investors who are celebrating Martin Luther King Day. The dollar entered the prolonged weekend stronger, but due to increased risk aversion and not (as was the case earlier) a bounce in US bond yields.

The US currency continues its corrective bounce. The EUR/USD exchange rate slipped below 1.21 mark, and the GBP/USD pair retraced below 1.3550. Higher risk aversion has so far prevented the USD/JPY from reclaiming the 104.00 handle.

Over the past week, the world's main market indexes have declined by about 1.5-2%. In the past few days, we have seen similar drops in copper and oil, the most important commodities for which demand depends on the global economy's strength and the strength of risk appetite. However, all these assets remain in close proximity to historical or long-term highs.

Next set of troubling news from across the pond

The risk aversion is based on data on retail sales in the USA. In December, the index fell for the third consecutive month as a result of pandemics and restrictions. Moreover, November's reading was revised very unfavourably. Consumption remains weak, as evidenced by data that exclude expenditures on (rising) fuel and food. As long as the restrictions remain in place, the situation will not improve clearly./p>

We should note that a similar evaluation should be made regarding the outlook for the labour market and plans for new income support: although helpful, they will certainly not be enough. At the same time, it shows that the global epidemic situation and the course of vaccination in the major economies will remain in the spotlight in the coming days.

In the area of macro data, Friday's Purchasing Managers' Index (PMI) readings should be noted. On Thursday, in addition to the weekly US labour market data, central bank meetings will be important. While the ECB meeting does not evoke excitement (after the December policy loosening), the Norges Bank's stance may be important for the krona's prospects, as it seems to be first in line for an interest rate increase.