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Global market watch - 22nd January 2021

The dollar is weakening at the moment, as the market looks forward to the President’s $1.9 trillion support package being passed. However, it may be prudent to keep in mind that quite often the dollar strengthens after inauguration, as the market realises that all the promises a President makes will not be kept. Certainly, there could be a logic in suggesting that as December saw a $900 billion support package passed by Congress, does the economy really need such a huge sum again to be injected? Also, President Biden has to negotiate the process of reconciliation in the Senate to get the package passed into law. This should make things easier as he only needs a simple majority in the Senate and filibustering is not allowed but his majority is the thinnest available, so it could still be difficult. On the economic front last week’s jobless claims were 900k, still a very high number, which suggests that the economy does need support. Today we have manufacturing PMI for release as the dollar has gained ground after weak UK and Eurozone economic data.
USD/CAD made a new low for 2021 but didn’t have the strength to push lower again yesterday on poor US jobless numbers. We have Canadian retail sales this afternoon and expect unchanged number after last month’s 0.4% gain.
The ECB kept monetary conditions unchanged with President Lagarde talking about very low inflation. She continued that regarding stimulus and monetary policy ‘nothing was off the table.’ Specifically, on FX she said the euro appreciation is a drag on inflation and reiterated that the ECB was ‘closely monitoring’ the level of the euro. Her last two comments produced slight weakness in the euro. This morning we have had weak PMI data. The composite survey, including manufacturing and services was released at 47.5, although this was only just below the expected 47.6. Under a reading of 50 shows contraction for the economy.
With event risk now out of the way, the market is looking to sell US dollars at the moment. One of the benefactors of this is sterling as the UK continues to vaccinate its population. It’s not all good news, however, as the Prime Minister suggested yesterday that the lockdown could last until the summer. On the economic front, we have just had the release of December’s retail sales, which came in below estimates, rising 0.4% rather than the 1% expected. The PSNB figure was GBP 33.4 billion and larger than the GBP 31.5 billion suggested. This was followed by first reading services and manufacturing PMI which were very disappointing, services PMI especially so. The market expected a figure of 45.2. which showed contraction anyway. However, the actual figure was a surprising 38.8. The services sector was hit by restrictions on trade and reductions for consumer spending. Business activity fell at the fastest pace for 8 months. The pound has fallen across the board on this data.
Technically speaking, the AUD is gainfully trying to take advantage of USD weakness, but is looking like a train at the top of a hill and running out of steam. If close by resistance levels above 0.7800 are exceeded, it could be a green light for more gains, but the picture isn’t clear at the moment.

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