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Sterling Down on Lockdown, Dollar Mixed Despite Stocks Selloff

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Sterling is currently trading as one of the weakest, as weighed down by the return to tough nationwide lockdown. Selloff in the Pound in crosses is keeping Euro and Swiss Franc afloat. Dollar attempted a rebound overnight, with the pull back in stocks. But there is apparently no follow through buying in the greenback yet. Canadian Dollar also reversed some gains as WTI crude oil was once again rejected by 50 handle. Other commodity currencies are mixed for now.

Technically, Yen pairs could be a focus for the near term. USD/JPY’s decline resumption has somewhat failed yesterday, as it’s quickly back above 102.87 low. Though, there is no sign of a sustainable rebound yet. EUR/JPY and GBP/JPY are both close to near term support at 125.92 and 139.44 respectively. Break of these levels would trying some near term buying in Yen and push USD/JPY lower.

In Asia, currently, Nikkei is down -0.10%. Hong Kong HSI is down -0.15%. China Shanghai SSE is down -0.05%. Singapore Strait Times is down -0.28%. Japan 10-year JGB yield is down -0.0046 at 0.018. Overnight, DOW dropped -1.25%. S&P 500 dropped -1.48%. NASDSAQ dropped -1.47%. 10-year yield closed flat at 0.917.

GBP/JPY dips as UK announced toughest nationwide coronavirus lockdown

UK announced the toughest nationwide coronavirus lockdown since March, as Prime Minister Boris Johnson warned that weeks ahead will be “the hardest yet”. The lockdown will last for at least seven weeks into mid-February. All non-essential shops and schools are closed while people are told to stay at home. The UK was entering “the last phase of the struggle”, Johnson said, adding: “With every jab that goes into our arms, we are tilting the odds against Covid and in favour of the British people.”

Sterling is clearly one of the weakest for this week so far, but downside is limited at this point. A focus would be on GBP/JPY. The choppy rebound from 133.03 is more corrective looking than not, considering both the structure and MACD momentum. Yet, break of 139.44 support is needed to indicate short term topping first. Further break of 136.96 support would suggest that the pattern from 142.71 is extending with a third leg through 133.03 support. But before that, another rise would be mildly in favor for a take on 142.71 resistance.

Fed Mester: Prospects are good for a much more favorable 2021

In a speech, Cleveland Fed President Loretta Mester said “prospects are good for a much more favorable 2021” with vaccines distribution underway and further fiscal relief. Though, “the next few months will be challenging ones” with increasing new cases of coronavirus, which are “putting strains on our healthcare system and limiting economic activity. “

She added that “so far the recovery has generally been stronger than anticipated”. This suggests that “we may have been underestimating the economy’s resilience and underlying momentum, as well as the ability of households and businesses to adapt to this unprecedented environment.” Recovery is expected to continue, but uneven over the year.

The post-vaccination phase of recovery is expected to “continue over the next few years, with growth above trend, declines in the unemployment rate, and gradually rising inflation”.

Overall, “monetary policy will need to remain highly accommodative for quite some time because achieving our monetary policy goals is likely to be a journey and not a sprint… The FOMC is, and will remain, fully committed to using our policy tools to achieve our goals, in support of a broad-based and sustainable recovery.”

Fed Bostic hopeful for asset holding recalibration this year, as progress made

Atlanta Fed President Raphael Bostic said in a Reuters interview he’s “hopeful” that moving into 2021, “signals for weakness start to dissipate and the conversation turns consistently and robustly to sort of steady and broad-based growth.”

“If we determine things have strengthened appreciably, that we have made significant progress, then we will think about the next appropriate action,” he added.

That is, if enough progress were made, Fed could start to bring its asset holdings back to a level “more inline” with the pre-pandemic levels. “I am hopeful that in fairly short order we can start to recalibrate.”

Fed Evans: It takes a long time to reach 2% average inflation target

In a speech, Chicago Fed President Charles Evans said if Fed tries to “fine-tune a very modest inflation overshoot of only a tenth or two, we run a very large risk of failing to achieve our 2 percent averaging goal within any reasonable amount of time”.

For him, “getting inflation moving up with momentum and delivering rates around 2-1/2 percent is important for achieving on our inflation objective in as timely a manner as possible.”

Bottom line is, it will “take a long time” for average inflation to reach 2%. “To meet our objectives and manage risks, the Fed’s policy stance will have to be accommodative for quite a while. Economic agents should be prepared for a period of very low interest rates and an expansion of our balance sheet as we work to achieve both our dual mandate objectives.”

On the data front

Japan monetary base rose 18.3% yoy in December. Germany will release retail sales and unemployment in European session. Swiss will release CPI. Eurozone will release M3 money supply. Later in the day, US ISM manufacturing is the major focus. Canada will release IPPI and RMPI.

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.2699; (P) 1.2749; (R1) 1.2832; More….

USD/CAD recovered quickly after hitting 1.2663 and intraday bias is turned neutral first. Outlook remains bearish with 1.2957 resistance intact. Below 1.2663 will resume larger fall from 1.4667 to 100% projection of 1.3172 to 1.2688 from 1.2957 at 1.2473. However, break of 1.2957 will indicate short term bottoming and turn bias back to the upside for rebound.

In the bigger picture, fall from 1.4667 is seen as the third leg of the corrective pattern from 1.4689 (2016 high). Further decline should be seen back to 1.2061 (2017 low). In any case, break of 1.3389 resistance is needed to indicate medium term bottoming. Otherwise, outlook will remain bearish in case of rebound.

Economic Indicators Update

GMT Ccy Events Actual Forecast Previous Revised
23:50 JPY Monetary Base Y/Y Dec 18.30% 16.50%
7:00 EUR Germany Retail Sales M/M Nov -2.20% 2.60%
7:30 CHF CPI M/M Dec 0.00% -0.20%
7:30 CHF CPI Y/Y Dec -0.70% -0.70%
8:55 EUR Germany Unemployment Change Dec 10K -39K
8:55 EUR Germany Unemployment Rate Dec 6.20% 6.10%
9:00 EUR Eurozone M3 Money Supply Y/Y Nov 10.70% 10.50%
13:30 CAD Industrial Product Price M/M Nov -0.40%
13:30 CAD Raw Material Price Index Nov 0.50%
15:00 USD ISM Manufacturing PMI Dec 56.5 57.5
15:00 USD ISM Manufacturing Prices Paid Dec 62.1 65.4
15:00 USD ISM Manufacturing Employment Index Dec 48.4

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