A lacklustre trading session for Europe in the absence of US markets yesterday, saw European equities finish the day rather mixed, with the FTSE 100 finishing the day on the back foot, while German and French markets finished the day modestly higher.
After the early week optimism of the first trading week of the year, a more realistic tone appears to have set in as the trade-offs from a vaccine programme that is increasing in pace, albeit at different speeds across Europe, are offset by concerns that lockdown restrictions may well have to get tighter first before being pared back, thus raising the risks of more permanent economic scarring.
Today’s European open is set to be a positive one, with Asia markets also moving higher this morning, ahead of this afternoon's testimony from incoming US treasury secretary, Janet Yellen. Currency markets also had a quiet session with the US dollar likely to be the main focus today, as Ms Yellen sits down virtually with US lawmakers where she will set out the new Biden administrations case for further large scale fiscal help for the US economy, given current record low levels of interest rates.
In her previous role as Federal Reserve chair Janet Yellen was always able to express an opinion on the strength or otherwise of the US dollar. The US treasury secretary role has traditionally been a little different, though the soon-to-be-gone incumbent, Steven Mnuchin, did stretch the rules in this regard, with comments that the US dollar was too strong.
Traditionally US treasury secretaries were discouraged from talking the US dollar lower, in what was universally known as a “strong US dollar policy”, a mindset which was reinforced in 1995 by treasury secretary Robert Rubin. The thinking was that pursuing a policy that might be construed as weakening the US dollar, might promote sharp declines in the dollar, or a collapse in its external value, which in turn could prompt a race to the bottom. It doesn’t mean of course that the US is advocating a policy that deliberately pursues pushing the dollar higher. It’s simply a matter of optics that US politicians don’t comment on the level of the currency, a convention that has been suspended for the past four years.
Yellen will also need to convince the more sceptical cohort of US lawmakers that the new Biden fiscal plan, where there is agreement on another $1,400 stimulus cheque, but where increases in the minimum wage and other safety net programmes are slightly more problematic, won’t cause an unsustainable rise in the US national debt. This is the main concern of the more fiscally-conservative US lawmakers, and something that Janet Yellen will have to use all of her political skills to convince is necessary, in the short term at least. Her biggest problem will be arguing the case that further stimulus is required urgently, to deal with a problem which to a large extent has been exacerbated by the very policies that the Federal Reserve has been at the forefront of over the last 12 years.
Today’s only economic data of note is the latest German ZEW survey for January, which is expected to show a modest improvement from 55 in December to 59.4.
Crude oil prices had a disappointing day as surging virus cases pulled prices further away from last week’s 11-month highs. While recent Saudi cuts helped push prices sharply higher, it would appear that concerns over a weaker demand outlook are now starting to act as an anchor as prices slip back, with the prospect of further losses a possibility in the coming days.
EUR/USD – looking soft with little way of a rebound off the 50-day MA thus far. A move below 1.2040 could well signal further losses towards the 1.1980 area, and possibly lower towards 1.1800. Resistance comes in at the 1.2230 area.
GBP/USD – tight range yesterday with resistance at the highs last week of 1.3710. While below here the risk of a move lower towards support at the 1.3420 area. A break here sees the potential for a move towards 1.3200. A break above 1.3720 opens up a move towards the 1.4000 area.
EUR/GBP – the 0.8860 area has so far held; however, the lack of any rebound suggests we could see a move lower towards the 0.8780 level if support gives way. Resistance comes in at 0.8930, and behind that at 0.8980.
USD/JPY – remains in a downtrend with resistance at 104.40 cloud resistance from last week. This area is a key barrier to further gains towards 105.20. While below 104.40 the bias remains for a move back towards the January lows at 102.60.