Tag: risk condition

Risk Conditions will Dominate Currency Markets

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Optimism over the 2021 global growth outlook has remained strong with on-going expectations that coronavirus vaccines would have a crucial positive impact next year. Political decisions will dominate in the short term with Brexit trade talks and US congressional developments. There has also been fresh optimism that the US Congress would agree a fiscal stimulus plan. This combination supported risk appetite with fresh gains for equities. In this environment, the US dollar lost ground with a fresh flow of funds into risk assets. There were still concerns over the short-term outlook with further coronavirus restrictions in Europe and the US. There were, therefore, strong expectations that global central banks would maintain very loose monetary policies. If risk appetite holds firm, the dollar will tend to remain vulnerable, but there will also be the risk of sharp reversal and high volatility, especially with liquidity declining into the holiday period.

EUR/USD

At its latest policy meeting, the ECB announced a further increase in its bond buying programme which will continue into 2022 and another round of cheap loans for the banking sector. There were no surprises in the statement and there was no escalation in protests against a strong Euro. The single currency overall made gains following the meeting. US data releases had little overall impact. The dollar overall remained on the defensive and EUR/USD moved above 1.2150. The Federal Reserve will announce its latest policy decision on Wednesday with the potential for changes to the bond-buying programme. The Fed will also release its latest economic projections and Chair Powell will hold a press conference. Markets expect an on-going commitment to a very loose policy, but the dollar could bounce if rhetoric is less dovish than expected.

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