Monex: Safe-haven dollar rebounds in response to Biden stimulus plan

15 januari 2021

Below is a short commentary in English by Ima Sammani, Currency Analyst at Monex Europe, on the US dollar, the euro and the British pound.

USD

The dollar has been regaining ground since yesterday amid concerns that President-elect Joe Biden’s $1.9tn stimulus plan may fail to win broad-based support, as Republican opposition is possible over the big-ticket spending. These concerns are reinforced by the voting procedure in the Senate: fiscal stimulus requires 3/5ths of the votes (60 votes) in order to pass.

Among the elements in the proposal are direct payments of $1,400, on top of the $600 approved in December, $350bn for state and local governments, $160bn in vaccination funding, $130bn to help schools reopen, and additional employment benefits. Biden highlighted last week that historically low interest rates offer space in the US to use deficit spending to strengthen the economy now.

Meanwhile, Federal Reserve Chair Jerome Powell supported the message from the monetary front, batting down talk of tapering the QE programme at the end of the year. Powell warned against an early exit of bond purchases as the economy is in no place right now to think of paring back the central bank’s bond-buying.

The fact that the US economy clearly needs all the stimulus it can get was confirmed by yesterday’s jobless claims which surged to 965K, far worse than the consensus of 789K and the worst print since Summer.

EUR

The euro traded near one-month lows against the dollar in yesterday’s late trading session following a rebound in the dollar, and is still trading around those levels. While the dollar has been rising on headlines around fiscal stimulus, the euro may be held down by Italy’s deepening political crisis as the nation is pushing for a larger budget deficit to be granted by the EU.

Prime Minister Giuseppe Conte’s team agreed on a €32bn increase in debt Thursday evening, which is a third larger than the amount Finance Minister Roberto Gualtieri mentioned in an interview last weekend. The increased political risk after Conte’s majority vanished this week undoubtedly plays a factor in the bid, as Italy now not only deals with a resurgent virus outbreak but also a political crisis.

On the data front, this morning’s economic calendar included an upward revision of the month-on-month harmonised EU CPI figures from Spain from 0.1% to 0.2% while all other inflation figures from France and Spain were confirmed.

GBP

Sterling enjoyed a little flutter of strength after the positive surprise in November’s GDP print this morning but has since retraced that move to continue trading 0.2% lower against the dollar. The GDP data saw the UK economy contract by 2.6% month-on-month in November, a full 2 percentage points above expectations.

This slip in the recovery came as Prime Minister Boris Johnson announced a national four-week lockdown in England on November 4th, while devolved nations also tighten lockdown measures. The positive surprise suggests that businesses are coping a lot better with the current waves of lockdown measures as GDP sits only 8.9% below its January 2020 peak.

This is a vast improvement despite the imposition of national lockdown measures compared with earlier months in the pandemic - the economy contracted 25% and 23% in April and May 2020 - and provides an inclination as to what the damage the lockdown is inflicting on the economy at present.

Sterling’s focus remains on the broad USD move today, however, and with the risk environment supporting the dollar, Swiss franc and Japanese yen, the pound is taking on some water.