The dollar extended gains across its FX peers on Monday as the EUR was hauled further to the downside. Disappointing Covid-19 report in Europe sparked risk aversion across asset classes.
January 25 recap ahead of London
Risk aversion is dominating the markets early in the week. The dollar index is building on the 90 support level after a critical breakout above the 90.32 technical neckline. The stock indices flashed to the downside with the S&P 500 retesting 3800 before a sharp recovery followed. Aussie, Kiwi and the Loonie are falling across the board as the buck, Yen and Swissy bask on the current risk-off sentiment. Risk-on cross FXs are the obvious biggest losers going into Monday’s London session.
Meanwhile, in the commodity market, oil prices are downbeat after shedding almost all of Monday’s gain. Gold and Silver are back where they started after a mixed Monday as the US 10-Yr yield fell flat. Overall, commodities are pressured right into the mouth of the London market.
The cryptos are downbeat after a good effort to break away from the current bearish zones. Bitcoin exchanges for $31,760 while Ethereum drops to $1,320 after falling short of the $1,500 psychological level. Ripple and Litecoin also shed a significant fraction of the early Monday lead.
Covid & Vaccines
It’s starting to look optimistic on the virus front as vaccine distribution catches up fast with the infection numbers. Countries on lockdown while administering the vaccines have seen quicker recoveries as well. The data from the UK is most especially very impressive despite the country having to battle with new strains of the virus. Reported cases have slowed down quite more significantly than in the rest of Europe and the US.
Overall, as a result of these two factors – lockdowns/restrictions and over 66 million doses rolled out, the global weekly change in reported cases is crashing fast. It’s a good one for the general market risk. However, the major setback is coming from Europe with the resurgence in Spain going almost parabolic. The effect is therefore weighing on the EUR against other FX.
The pace and efficacy of vaccination is very important as the world fights to recover from the virus and its new variants and mutations. Vaccination has to outrun the spread of the virus to keep the hopes of fast recoveries intact. However, going forward, the major downside risk is a fresh mutation surfacing that the current vaccines can not deal with. Policymakers and investors are watching with keen interest. The market’s response to the developments around the virus is currently moderate or even quiet since everything is going as expected. However, a swing away from the norm – positive or negative- could drive the market wild again.
Soft macros expected on Tuesday. Meanwhile, GBP average earnings, claimant count change and unemployment rate will be released and later today will come the US CB consumer confidence data. The main economic focus of the week is on the Wednesday FOMC policy statement.
In the FX market, the dollar index could rally further above 90.6 and up to 91 if the market momentum resumes. Otherwise, a sideways move is most likely as the market currently has no trigger of note until tomorrow. To the downside, however, any chance of a break below 90.2 will pressurize the greenback further across the FX board.
EURUSD is expected to be pressured below the 1.21 critical support and down toward 1.2 as covid weighs on sentiment. Similarly, GBPUSD should continue downside if it breaks below the neckline (1.363) of the current head and shoulder reversal pattern (top at 1.3745 and neckline at 1.363). The immediate bearish target will be at 1.352. USDCAD to 1.29 is very much likely especially if the oil prices drop further on the current risk-off. USDJPY, on the other hand, could be the laggard of the London and New York sessions due to the safe-haven nature of the dollar and yen. While the pair near-term outlook remains to the upside with targets above 104.5, it would require an extra trigger. AUDUSD should plummet further to 0.764. However, NZDUSD is expected at 0.714 as it continues to withstand the current pressure more than its Aussie brother.
In the commodities market, Gold has the potential to drop toward 1835-1830 before resuming the larger bullish correction. Oil prices still maintain a bullish outlook. However, the current risk-off pressure could force WTI and Brent below $52 and $55 respectively in the short term.
In the crypto market, fresh bearish momentum is building after the unsustainability of Monday’s recoveries across the board. Bitcoin can now hit $28,000 and below while Litecoin could extend its journey toward $100. Ethereum has just completed a bearish wedge/diagonal. ETH thus has a potential to hit below $1,200 today and below $1,000 this week before the next bullish phase begins.
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