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Markets are on the back foot amid concerns of a quick return to growth, reflating or even inflating prices, with bond yields, oil and copper on the rise, but the dollar falling. The UK’s roadmap of returning to normal, the German IFO Business Climate and news related to US fiscal stimulus are eyed.
Reflation trade: Investors are awaiting what President Joe Biden and fellow Democrats pass in Congress – up to $1.9 trillion in covid relief – and what they might do afterward. The administration is considering vast infrastructure spending. Prospects of high debt issuance have caused a sell-off in bonds, but the higher yields have yet to boost the dollar.
Commodities “supercycle:” China’s 2020 growth and prospects of a US rebound have boosted oil prices after a short profit-taking move. It is unclear how Saudi Arabia and Russia will manage output cuts moving forward. Copper has surged past $9,000 amid supply issues on top of expectations for robust global growth.
Jerome Powell, Chairman of the Federal Reserve, is scheduled to testify before Congress on Tuesday and on Wednesday, yet his prepared remarks may come out as early as Monday. The central banker’s comments on inflation, employment and other topics will be closely watched.
UK: GBP/USD is holding onto 1.40 it reached late last week and ahead of a highly anticipated speech by Prime Minister Boris Johnson on easing restrictions. According to reports, he is set to lay out a cautious roadmap to reopening and stress the importance of vaccinations.
Europe: The German IFO Business Climate figures for February are set to show an improvement in sentiment, echoing similar figures from ZEW. EUR/USD has been hovering above 1.21.
“On Tuesday, the Conference Board’s Consumer Confidence Index from the US will be watched closely by market participants. As we have seen in the past couple of weeks, a positive reading could help the USD gather strength and force XAU/USD to remain on the back foot.”
“Friday’s Core Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s preferred gauge of inflation, will be next week’s key data to watch. The market consensus points out to an annual increase of 1.4% and a higher-than-expected print could make it difficult for XAU/USD to gain traction.”
“On the upside, the descending trend line coming from early January is currently forming strong resistance around $1,800 psychological level. As long as this line remains intact, sellers will look to dominate gold’s price action. The next technical hurdle is located at $1,820 (20-day SMA) ahead of $1,826 (static level).”
“The immediate support could be seen at $1,770. A daily close below that support is likely to open the door for additional losses toward $1,760 (multi-month lows) and $1,750 (former resistance from May/June 2020).”
24-hour view: “Our expectation for USD to ‘trade sideways’ last Friday was incorrect as it dropped to 105.22 before closing on a soft note at 105.43 (- 0.22%). While downward momentum is not exactly strong, there is room for USD to retest the 105.20 level before a more sustained recovery can be expected. The prospect for a break of the ‘strong support’ at 105.00 is not high. Resistance is at 105.70 followed by 105.90.”
Next 1-3 weeks: “Last Tuesday (16 Feb, spot at 105.40), we highlighted that USD ‘is expected to trade with an upward bias and a break of 105.76 would shift the focus to 106.00’. USD subsequently soared to 106.21 before easing off. Last Friday (19 Feb, spot at 105.75), we indicated that USD ‘could consolidate for a few days first before pushing higher to 106.35’. We did not quite anticipate the rapid drop to 105.22. Upward momentum has waned quickly and the prospect for further USD strength has diminished considerably. In order to rejuvenate the flagging momentum, USD has to move and stay above 105.90 within these 1 to 2 days or a break of the ‘strong support’ at 105.00 would not be surprising (and would indicate that 106.35 is out of reach this time round).”
24-hour view: “We highlighted last Friday that GBP ‘could edge above 1.4000 first before a pullback can be expected’. We added, ‘the next resistance at 1.4050 is unlikely to come into the picture’. Our view was not wrong as GBP rose to 1.4036. GBP is currently approaching 1.4050 and in view of the solid momentum, a break of this level would not be surprising. That said, the next resistance at 1.4100 is likely out of reach for now. Support is at 1.4005 followed by 1.3975.”
Next 1-3 weeks: “Last Friday (19 Feb, spot at 1.3960), we highlighted that ‘strong boost in momentum suggests GBP could crack 1.4000 and head towards 1.4050’. GBP subsequently took out 1.4000 with ease as it soared to a high of 1.4036. Upward momentum remains strong and GBP could advance further to 1.4100. The next resistance is at 1.4150. On the downside, the ‘strong support’ level has moved higher to 1.3920 from Friday’s level of 1.3870. A break of the ‘strong support would indicate that the positive phase in GBP that started about 2 weeks ago has run its course.”
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