U.S. dollar sell-off gains traction again (Daily analysis 16.12.2020)

Risk assets and currencies are boosted amid stimulus hopes, another round of positive vaccine news and signs that a trade deal between the U.K. and E.U. might be close. Consequently, the U.S. dollar weakness prevails and the pound sterling outperforms as we enter an action-packed part of the week.

EUR/USD gets lifted above to 1.22 and GBP/USD enjoys the ride above 1.25. The Aussie fully retraced a recent corrective pull-back and approached 0.76. Other risky G-10 currencies, namely the Scandies, post further gains as well. In the emerging markets space, the South African rand outperforms and has already soared almost 2% this week.

The euro boosted by PMIs data, the pound by Brexit progress

Eurozone PMIs surprised on the upside and gave the common currency another gentle push higher. Whereas manufacturing's resilience has been a long-known fact, the huge bounce in services is a shocker.

As far as a trade deal is concerned, there is a stir among Tory MPs indicating apparent progress in the Brexit talks. A crucial sign would be an announcement that the House of Commons will sit next week in order to be able to approve a potential deal. The decision on that issue will be taken tomorrow and might precede official statements. Hopes for a deal are clearly on the rise.

FOMC to stay put (for now)

Later on the day, U.S. retail sales will provide insight into how the sharp increase in COVID-19 infections and new restrictions has impacted the consumption. In the evening, The Federal Reserve will likely refrain from adding more stimulus but reinforce its dovish rhetoric and urge congress to provide more fiscal stimulation finally. Some policy tweaks are on the cards but most likely will be introduced no sooner than in Q1 2021. They should be focused on preventing the long term yields from rising and, therefore, negative for the greenback.

Conotoxia research team