The US dollar bounces off from long term lows (Daily analysis 2.12.2020)

New efforts to provide the US economy with fiscal stimulus bode ill for the greenback but push the S&P500 to set a new all-time high. The EUR/USD pair broke the 1.20 boundary, and the common currency outperforms as December begins.

The EUR/USD pair enjoyed a ride higher to settle comfortably above the 1.20 mark. A rally was initially triggered by the US dollar weakness, accelerated above the 1.20 handle. The move higher unlocked upside for other currencies, but the euro remained the biggest winner. The pound sterling traded strongly as well, but the cable's advance faded below yearly highs at 1.35. On Wednesday, the greenback advances mildly as markets enter a correction. Equities trade in the red and crude oil benchmarks thread the water ahead of a postponed OPEC + meeting on Thursday. The cable underperforms and slips to 1.3350 after the Chief European Negotiator warned that three key issues remain unsolved, which stands in opposition to previous headlines suggesting the fishery is the only bone of contention.

The EUR/USD pair’s advance at the ECB’s grace

Although the US dollar fundamentals point to further weakness in a reflationary environment, the sustainability of the recent break above 1.20 will be determined in the short term also by the European Governing Council willingness to accept the common currency's strength, which tightens fiscal conditions, has a disinflationary impact and dents competitiveness of EU's companies. Some verbal interventions or controlled leaks might be on the cards even before next week's Governing Council meeting. The upsurge above 1.20 might result in a bolder easing package as well.

A revival of fiscal hopes

A fiscal package might be approved in December as numerous US senators argue that some additional support to the economy struggling with the second wave of COVID-19 infections should be attached to a broader government spending bill. The need for more stimulus is also recognized by a bipartisan group which argues for a package which value amounts to over USD 900 bn. Such a proposition is widely endorsed by a wide choir consisting of Treasury secretary nominee Janet Yellen, Fed Chair Jerome Powell, and president-elect Joe Biden.

Conotoxia research team