FX Update – December 7 – USD Bounces, Sterling Flounces

<p><strong>EURUSD</strong> posted a correction low at <span><strong>1.2078</strong></span> before finding a footing and recovering <strong><span>1.2100</span>.</strong> The low marked a near 1 big figure pullback from Friday’s 32-month peak at <strong><span>1.2177</span></strong>. A near 1.5% tumble in Cable exerted a drag on EURUSD, especially with the Euro itself not being immune from no-deal Brexit risk. Recent gains in EURUSD have mostly been reflective of broader Dollar weakness, with the imbalance in richly valued US equities versus lower valued European and emerging market equities having rendered the Dollar apt to underperformance amid a backdrop of rising optimism about longer-term global economic prospects. More of the same is expected over the coming months, though the pair may be ripe for a pause in its up trend. The ECB will announce its latest “policy recalibration” this Thursday, which is almost certain to involve a strengthening of the PEPP and TLTRO programs along with a more symmetric inflation target, although anyone hoping for another easing bonanza are likely to be disappointed.</p>
<p><a href="https://analysis.hotforex.com/wp-content/uploads/2020/12/2020-12-07_14-40-34.png"><img loading="lazy" class="alignnone size-full wp-image-193914" src="https://analysis.hotforex.com/wp-content/uploads/2020/12/2020-12-07_14-40-34.png" alt="" width="753" height="560" srcset="/wp-content/uploads/2020/12/2020-12-07_14-40-34.png 753w, /wp-content/uploads/2020/12/2020-12-07_14-40-34-300×223.png 300w, /wp-content/uploads/2020/12/2020-12-07_14-40-34-80×60.png 80w, /wp-content/uploads/2020/12/2020-12-07_14-40-34-265×198.png 265w, /wp-content/uploads/2020/12/2020-12-07_14-40-34-485×360.png 485w, /wp-content/uploads/2020/12/2020-12-07_14-40-34-696×518.png 696w, /wp-content/uploads/2020/12/2020-12-07_14-40-34-565×420.png 565w" sizes="(max-width: 753px) 100vw, 753px" /></a></p>
<p>In the US, November inflation data this week will interest given that the relatively high inflation differential versus the eurozone and other major economies has been a negative for the Dollar, given the resulting loosening impact on real interest rates in the US, particularly with the Fed’s new average inflation policy strategy allowing inflation to run hot. Expectations are for a slight slowing to a 1.1% y/y clip for the headline CPI, versus the 1.2% y/y prior pace. Core prices should remain steady at a 1.6% y/y growth rate. These are hardly hot numbers, but y/y base effects in energy prices and a recovery in economic activity (assuming a successful Covid vaccination program, release of pent up consumer demand, stimulus etc) should mean higher inflation ahead, resulting in greater loosening in real interest rates.</p>
<p><a href="https://analysis.hotforex.com/wp-content/uploads/2020/12/2020-12-07_14-37-27.png"><img loading="lazy" class="alignnone size-large wp-image-193904" src="https://analysis.hotforex.com/wp-content/uploads/2020/12/2020-12-07_14-37-27-1024×371.png" alt="" width="696" height="252" srcset="/wp-content/uploads/2020/12/2020-12-07_14-37-27-1024×371.png 1024w, /wp-content/uploads/2020/12/2020-12-07_14-37-27-300×109.png 300w, /wp-content/uploads/2020/12/2020-12-07_14-37-27-768×278.png 768w, /wp-content/uploads/2020/12/2020-12-07_14-37-27-1536×557.png 1536w, /wp-content/uploads/2020/12/2020-12-07_14-37-27-696×252.png 696w, /wp-content/uploads/2020/12/2020-12-07_14-37-27-1068×387.png 1068w, /wp-content/uploads/2020/12/2020-12-07_14-37-27-1158×420.png 1158w, /wp-content/uploads/2020/12/2020-12-07_14-37-27.png 1597w" sizes="(max-width: 696px) 100vw, 696px" /></a></p>
<p>European stock markets are broadly lower, with the <strong>UK100</strong> a notable exception, although a lower Pound will likely have played a role and not all UK indices are up on the day. The lack of progress in Brexit talks is adding to the cautious backdrop this morning and saw the German <strong>GER30</strong> overlooking much stronger than expected production numbers at the start of the session and falling -0.4%. US futures are also down, with the <strong>USA100</strong> future outperforming slightly as defensive tech stock is back in fashion. Wider markets continue to wait for a US stimulus deal, while trying to weigh the prospect of a recovery next year against the short term prospect of a difficult winter in Europe and the US. China data meanwhile continued to confirm that the recovery continues with very strong export growth fuelling a record trade surplus. Signs of fresh US-China tensions, however, added to a cautious backdrop overnight and the Nikkei closed with a loss of -0.8%, the Hang Seng dropped -1.2 and the CSI -0.9%, while the ASX outperformed with a gain of 0.6%.</p>
<p><a href="https://analysis.hotforex.com/wp-content/uploads/2020/12/2020-12-07_14-27-48.png"><img loading="lazy" class="alignnone size-full wp-image-193893" src="https://analysis.hotforex.com/wp-content/uploads/2020/12/2020-12-07_14-27-48.png" alt="" width="937" height="777" srcset="/wp-content/uploads/2020/12/2020-12-07_14-27-48.png 937w, /wp-content/uploads/2020/12/2020-12-07_14-27-48-300×249.png 300w, /wp-content/uploads/2020/12/2020-12-07_14-27-48-768×637.png 768w, /wp-content/uploads/2020/12/2020-12-07_14-27-48-696×577.png 696w, /wp-content/uploads/2020/12/2020-12-07_14-27-48-506×420.png 506w" sizes="(max-width: 937px) 100vw, 937px" /></a></p>
<p>Technically, with today’s movement the <strong>GBPUSD</strong> bias has turned neutral and some consolidation could be seen. A break of the psychological level <span><strong>1.3500</strong></span> or resistance <strong><span>1.3538</span></strong> could target the fib projection of <strong><span>1.395</span><span>6</span></strong>. However, it will be temporarily delayed after today’s news. On the downside, a break of <span><strong>1.3195</strong></span> and the 50.0% fib will indicate a short term top and turn bias to the downside at <span><strong>1.3115</strong></span> and the 61.8% fib level from November 12/13.</p>
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<p><strong>Stuart Cowell</strong></p>
<p><strong>Head Market Analyst</strong></p>
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