On the foreign exchange markets, the US dollar continued its strengthening, which has begun at the beginning of the year. For the second week, except for a small period of consolidation, the dollar continued to strengthen.

The world markets ended last week with a fall in stock indices and an increase in demand for the US dollar. Investors reacted to a powerful rally at the end of 2020, which was primarily inspired by the introduction of vaccines against coronavirus and the promise of Congress and the President-elect of the United States, Joe Biden, to adopt new measures to support the country’s population and economy.

But since the beginning of the new year, it became clear that the ongoing pandemic, political instability in America and, in general, large-scale problems in the country and in the Western countries did not contribute to the growth of positive sentiments in the financial markets. An important question is raised on this wave before investors, what is happening in the markets? Is it just a small corrective pullback or a relatively large-scale start of a corrective decline after the beginning of the recovery in demand for risky assets last spring?

In my opinion, there are serious reasons for the continuation of the correction, since all the positive reasons have already lost their weight for the investors. There is a high probability that the companies’ reports for the fourth quarter of last year will be weaker than expected. Besides, the extremely negative trends in the labor market in America, rising inflationary pressures are becoming the reasons for fixing the previously received profits.

The foreign exchange market dynamics and the stock, commodity, and debt markets are entirely dependent on these processes. I can even say that it depends even more on everything that happens.

The strengthening of the euro is clearly unfounded. Lockdowns in Europe continue to hold back its recovery. And in such situation, the euro’s growth is simply disastrous for its economy. That is why many in the market expect a tough reaction from the ECB on this issue at the regulator’s next meeting. The behavior of other major currencies against the dollar also fits neatly into this picture.

Thoughts and conclusions:

Assessing the general situation on the markets ahead of Biden’s inauguration this week on January 20, which may stimulate the growth of tensions in the United States, it is likely that the markets will either continue to decline, and the dollar rate will strengthen, or, at best, the process of consolidation will begin. And further dynamics will largely depend on what is happening in this country.

By Maksim FXbro