The last full trading week for 2020 will be a busy one. There are four central bank meetings, December PMIs, and employment and consumer spending reports from many countries on the calendar. In fact, not even one major economy escapes the release of market-moving data. With that in mind, the main focus will still be on the U.S. dollar. Investors continued to sell dollars on Monday, kicking off what could be the fourth straight week of losses. Low interest rates, reserve diversification and a global vaccine rollout are all reasons for the dollar’s decline. U.S. stocks consolidated, but its record-breaking moves this month reflects the shift into risk assets, which is consistent with the dollar losing its safe-haven bid.
This week’s upcoming Federal Reserve meeting is another reason for the dollar’s decline. There’s growing belief that after the central bank’s two-day meeting, it could increase asset purchases and lengthen the maturity of bonds it is willing to buy. The Fed may also shift to an outcomes-based guidance that would tie tightening to specific goals. Aside from these changes, Fed Chairman Jerome Powell’s tone along with adjustments to the bank's economic projections will also be affected. Changes in interest rates are not expected. For the central bank, the impact of vaccine rollout will be weighed against joblessness. We would not be surprised to see a tinge of optimism from Powell even as jobless claims are rising. The dollar is deeply oversold and it won’t take much for short covering. The dollar could see a lift from retail sales, which are also due for release a few hours before FOMC. Economists are looking for spending to fall, but with wages rising and online spending hitting a record, the risk is to the upside. Last, but certainly not least, everyone will also be watching stimulus talks.
The market’s appetite for U.S dollars will determine how many currencies trade, but there’s enough global data for divergences to cause big moves for currency crosses. In addition to the U.S., the UK, Japan and Switzerland also have monetary policy announcements. The Bank of Japan and Swiss National Bank meetings are typically not very market-moving, but the Bank of England’s outlook could have a significant impact on how sterling trades. Thanks to the pledge by UK and EU officials to keep talks going beyond their prior deadline, GBP is the strongest currency on Monday. There’s still nothing definitive and the headlines could turn negative at any point, which is why the BoE will remain dovish. PMIs, inflation, employment and retail sales figures are also due from the UK, making it an exceptionally busy week for sterling.
The euro resumed its rise, coming within a pip of 2.5-year highs versus the U.S. dollar. Broad-based U.S. dollar weakness and stronger Eurozone industrial production numbers helped fuel the pair’s gains. Eurozone PMIs and the German IFO report are scheduled for release later this week. Recent lockdowns should drive PMIs lower, but the expectations component of IFO could rise on vaccine optimism. Even if it does, the German government’s decision to go into nationwide lockdown until Jan. 10 is a big problem for its economy and, in turn, the euro. They previously considered shutting down shops after the Christmas holiday, but the number of cases and deaths deteriorated to the point where they felt that a sweeping lockdown was needed immediately. Italy could follow as the number of deaths exceed the UK.
For the commodity currencies, the most important releases will be Australian employment, New Zealand's third quarter GDP and Canada’s inflation report. All three extended their gains against the greenback on Monday and we are looking for improvements all around. By reopening the state of Victoria, Australia stands to see further employment gains. The third quarter was strong for many countries and New Zealand is no exception. Inflation in Canada should also be stronger given the sharp increase in the price component of IVEY PMI.