Weekly Market Outlook: The US dollar, stimulus and stocks in focus
It’s setting up to be another interesting week for financial markets as the US dollar brushed off the worst jobs report since April 2020 last week. Market participants were shocked when 150,000 jobs were lost in the economy during December against an expected 50,000 increase in jobs.
Surprisingly, the US dollar rallied higher in the short-term after the news as traders question just how much lower the worst-performing currency of the past several months can go. Now that the Democratic Party has gained full control of the Congress, larger stimulus measures are expected but may already be priced into markets.
The stimulus expectations have helped US stock market indices to new all-time highs with European stock indices also enjoying some of the positive flows. With a relatively quiet economic calendar, all eyes will be on these larger themes.
You can learn more about some of these themes in this selection of education articles:
- The Best Shares to Buy in 2021
- How to Trade the US Dollar Index
- Want to Beat the Market? Try Dogs of the Dow 2021
Weekly Forex Calendar
Source: Forex Calendar provided by Admiral Markets UK Ltd.
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Trader’s Radar - The US Dollar
For much of 2020, the biggest theme in the currency market was the weakening US dollar. The anticipation of a large stimulus package, a divided country and poor handling of the coronavirus pandemic helped the US dollar to remain one of the weakest currencies against most of the G10.
Last week, the US Non-Farm Payroll figure confirmed the weakness plaguing the economy. Analysts were expecting 50,000 jobs to be added to the economy but instead, it lost 150,000. However, the unemployment rate ticked higher as did hourly earnings. The US dollar subsequently rallied higher on the news announcement but it may be too early to get excited.
The US dollar index - an index of the US dollar against a basket of other currencies - is fast approaching some critical levels of historical support. From this technical basis, a reversal of fortunes could be on the cards. However, the zone of support is large, as shown in the long-term chart below:
Source: Admiral Markets MetaTrader 5, USDX, Monthly - Data range: from Nov 1, 2004, to Jan 8, 2021. Performed on Jan 8, 2021, at 7:00 pm GMT. Please note: Past performance is not a reliable indicator of future results.
The zonal area of support sits between the two lower black horizontal support lines on the chart in between the 88.00 and 89.00 levels. However, the price has moved meaningfully into this level suggesting there could still be some downside yet to come but unlikely to repeat the momentum we have had over the past few months.
Other US dollar related currency pairs are also approaching levels of support, such as USDCAD as shown by the ascending support level in the long-term monthly chart below:
Source: Admiral Markets MetaTrader 5, USDCAD, Monthly - Data range: from Dec 1, 2005, to Jan 8, 2021. Performed on Jan 8, 2021, at 7:30 pm GMT. Please note: Past performance is not a reliable indicator of future results.
The real test for the US dollar may be dependent on how investors weigh up the risks of the world’s second-largest currency the euro. Watching price action up until the European Central Bank press conference on the 21 January could be interesting in identifying where larger institutions see the next big move.
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Corporate trading updates and stock indices
Global stock market indices have continued their rallies higher to start the year. Expectations of big stimulus measures coming from Joe Biden and the Democrats have helped underpin demand for US stocks.
However, it is worthwhile keeping an eye on some of the sector plays that are developing, as the rally higher has been uneven. While long-term investors have continued to rotate into value stocks, we are now starting to see a rotation back into growth stocks.
European stock markets have also enjoyed some of the positive flows from the US. Currently, the DAX 30 is trading at record highs with France 40 and FTSE 100 still some way off their respective all-high price levels. On a successful rollout of the coronavirus vaccine, European stocks may be more favoured due to the undervaluation compared to other stock markets.
Source: Admiral Markets MetaTrader 5, SP500, Daily - Data range: from Apr 17, 2020, to Jan 8, 2021, performed on Jan 8, 2021, at 8:30 pm GMT. Please note: Past performance is not a reliable indicator of future results.
Past five-year performance of the S&P 500 circa: 2020 = +16.17%, 2019 = +29.09%, 2018 = -5.96%, 2017 = +19.08%, 2016 = +8.80%, 2015 = -0.82%.
The daily chart of the S&P 500 still confirms an uptrend with the 50-period (red), 100-period (green) and 200-period (blue) exponential moving averages all moving upwards. You can also learn more about specific stock plays that could be interesting in 2021 in:
It’s also the start of US earnings season with JP Morgan, Citigroup and Wells Fargo reporting on Friday.
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