The U.S. Dollar was able to hold on to most of its recent gains, with the exception of the British Pound and Mexican Peso which picked up steam overnight.
The Asian and European trading sessions seem to fade recently negative news items and resumed to edge higher. Additionally, investors continue to scratch their heads as they navigate these strange times while experimenting with crypto markets and coping with an increase in the yield curve. Will inflationary growth expand enough for the Fed to consider intervening? Lately, the Fed has received criticism for its policies, but we will get to hear their side from officials speaking at various events throughout the day.
As political headlines overtake market ones, we will have to wait until tomorrow for a deluge of economic data that can influence FX flows more clearly. Oil prices ignored the negativity emanating from traders as well, thus improving some of the petro-currencies and hitting the brakes on emerging-market that were dropping for weeks. As optimism gradually grows, expect the buck to be challenged some, but indicators from the other side of the pond could also help maintain buck buoyant if December proves to have slowed down momentum significantly.
What to Watch Today…
- No major events scheduled for today
The Mexican Peso and other emerging-market currencies got relief from the dollar strengthening as markets calmed down in their dark forecast of the immediate future. In general, there is concern that higher yields in the U.S. could lead to a flight from EM assets, but this all depends on the reason behind it.
Currently, the yield curve is steepening in the U.S., but if the Fed gives indication that it will intervene to control the curve, as they do already in the Bank of Japan, EM currencies will be at near ranges. Much of the world expects the new Democratic government in the U.S. to spend a lot of money and the yield increase could be the only response to those expectations. There is fear higher yields could mean quantitative easing tapering or even higher interest rates down the line, but this is inconclusive and the main reason for high alert in markets right now.
The Pound improved as traders are lowering their bets that the Bank of England will be exercising negative interest rates to support the economy. It is a historic time as COVID interferes with a transition to Brexit that comes with its own headaches and pains. Officials at the BOE have also been honest in their assessment that the deal agreed upon was not ideal for long-term economic prospects. Nevertheless, BOE Governor Andrew Bailey said he sees a lot of issues when it comes to sub-zero rates and traders agreed.
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