Risk assets started the week on a high note, but the hunt for yield faded, and the FX markets lack direction as investors weigh optimistic headlines and worrisome pandemic situation. The US dollar remains weak despite a mixed performance of equities and modest declines of commodities prices.
The EUR/USD pair trades close to 1.2150
The GBP/USD exchange rate bounces towards 1.3450. It was triggered by the fact that the news regarding the continuation of the talks has been partially retracted as investors await new headlines and the EU's chief negotiator Michel Barnier labelled the next few days as critical. The Australian dollar underperforms as trade tension with China resurfaces. The AUD/USD pair tries to remain above 0.75 as reportedly more than 50 ships carrying Australian coal have been stranded off China after ports were unofficially ordered not to accept such shipments.
The EUR/USD uptrend intact
New headlines continue to suggest that Congress will pass a fiscal package near the USD1tn mark before the December 18th deadline. The approval of Majority Leader Mitch McConnell will be crucial for accepting a bill in the Republican-dominated Senate. The EUR/USD pair's uptrend remains intact, and further upside is expected.
The US dollar faces headwinds from a benign risk environment, negative real yields, rising debt stock combined with a current account deficit, but also hedging practices. On the contrary, the euro is supported by a less dovish than feared central bank and a breakthrough on the Recovery Fund. A happy final to the Brexit saga would be a boost as well. Numerous investors decided to stay sidelined due to recent risk events. Therefore, a buy the dips strategy should prevail. Over the first quarter of 2021, a significant pullback might occur as some investors might conclude that while betting on a positive scenario for the euro, the reflationary theme happened to soon given a grim economic outlook for the coming weeks.
Conotoxia research team