Risk appetite dominates, the greenback declines (Daily analysis 16.11.2020)

Markets are balancing between the worrying COVID-19 situation and hope around the vaccine, which results in fluctuation in the trading. The US dollar (greenback) depreciates against other G-10 peers as optimism takes over.

The week has started with clear US dollar weakness and a mild risk-on with equities and commodities trading in the green. The EUR/USD pair advances to 1.1850, the GBP/USD pair trades above the 1.32 mark. The Scandies continue to outperform. The Norwegian krone is also supported by surging crude oil prices; Brent soars over 1% on Monday morning. In the case of emerging markets, the Russian ruble, the Mexican peso and the South African rand enjoy the best start to the week.

Three drivers of the US dollar weakness

The greenback is on the backfoot as several developments support risky assets and currencies. Firstly, the risk of a nationwide, strict lockdown in the United States has significantly faded. President Trump and President-elect both rejected this idea over the weekend despite new cases spiking higher and higher. Secondly, investors hope for another round of positive COVID-19 news, this time from Moderna or AstraZeneca/University of Oxford. Finally, a handful of constructive data releases from Asia also played a minor role in supporting the risk appetite.

The Brexit talks and US data in the limelight

So far, the US economy has defied the worsening COVID-19 situation as well. This positive trend should be reflected in both retail sales and industrial production readings. The pace will be extremely hard to maintain, and key regional economic activity surveys might offer a glimpse where the economy is heading in the final weeks of 2020.

The United Kingdom – European Union negotiations should be the main market driver this week as a breakthrough is reported to be close. The odds are clearly in the way of a deal, but as we have learnt throughout the Brexit process that nothing can be taken for granted. The talks continue this week and reaching an agreement would be a positive stimulus for the pound and a trigger of the GBP/USD pair's rally.

Conotoxia research team