December 1st is here, and so trading begins for the last month of the year. 2020 has been an unusual year for everyone, and financial markets express this feeling completely.
All major U.S. stock market indices made new all-time highs during the pandemic. I mean, with the world on the brink of collapse, investors kept bidding for stocks. This alone expresses the weirdness of a year marked by uncertainty and extreme monetary policy experiments.
Today we will have Fed’s Powell testifying in front of the CARES act before the Committee on Banking, Housing, and Urban Affairs. While the text of the hearing was released yesterday, this is a Q&A session, and everything can happen.
Consensus for a Lower USD
The USD continues its slide against its major rivals. Yesterday we saw the EURUSD reaching 1.20 for the second time this year, despite the ECB making strong verbal intervention against its strength last time the pair was trading so high.
However, this is nothing but an exchange rate that presents the value of one currency in terms of another, and if the USD is perceived as weaker, there is not much the ECB can do. Also, the EURUSD is not a gauge of competitiveness. In fact, if we look at the nominal EURUSD since 2019, we see that it is barely up 3% against a basket of 27 different currencies. Yet, the ECB did not express its concerns about a stronger Euro, but about a stronger EURUSD exchange rate.
The consensus in the market is that 2021 will be a year dominated by a reflation theme. Effectively, the pillar of such a consensus is a lower USD. In other words, everyone is positioned for a lower USD, and this may very well be the case in 2021, but until then, there are still some events this month as the year is not over yet.
Today’s Powell testimony happens in a week marked by the NFP on Friday. As such, no matter what he says, the tendency is that no real change in trends will happen this week until late in the second half of it. Moreover, by the time Friday comes, investors already prepare for next week’s ECB press conference. That is the one that matters for the EURUSD and if the EURUSD turns from 1.20, the USD will turn across the board.