The ECB stole the show (Daily analysis 28.01.2021)

Equity sell-off supports the US dollar and the Swiss franc while commodity currencies underperform. The European Central Bank reinforced it’ unwillingness to accept recent euro exchange rate levels. The Federal Reserve meeting turned out to fail in distracting investors from sinking equity markets.

Jerome Powell disillusioned everyone who had previously been betting on scaling back the pace of asset purchases before the end of the year. The tapering debate is probably off the table for now. At the same time, the threat that the ECB could cut the key interest rate if the euro continues to rally remains valid. As a consequence, the EUR/USD pair may lack direction in the coming weeks. For now, it hovers around the 1.21 mark and grinding lower towards 1.20 seems more likely than regaining the upward momentum. Noteworthy, the 10-year yields on the US Treasuries have recently clawed back below 1 pct. If the dollar is to trade higher, given the recent environment, it would most likely be boosted by growing risk aversion and worrisome slow progress of the EU’s vaccination programme.

The Australian dollar is the main G-10 underperformer, as the AUD/USD exchange rate dives towards 0.76 boundary after breaching the mid-month lows at 0.7660. Emerging markets feel the pressure as well with the Mexican peso experiencing the strongest sell-off.