CFTC's Friday report showed that the prolonged weakness of the euro is likely to end. The total short position on the dollar declined by 2.956 billion, which mostly affected the euro and the Japanese yen. At the same time, it is clearly early to talk about a reversal – the market had not yet made a reaction to the FOMC meeting by the time the report was created, and the optimism from the start of mass vaccination was not yet overshadowed by reports of the spread of a new strain of COVID-19.
Here, the investors are being influenced by two key factors: Brexit negotiations and US fiscal stimulus, which clearly had not been resolved by Monday morning. On Sunday morning, it became known that negotiators in the US Congress had reached a preliminary agreement on new incentives. The new budget package is expected to amount to about $ 900 billion (4.5% of GDP), which includes payments of $ 600 for households, $ 300 in unemployment benefits, as well as additional financing for small and medium business.
The final agreement can be made in the next few hours. In this case, the dollar will receive support.
EUR/USD
Germany's business climate indices in November turned out to be better than expected. The largest growth was recorded in the manufacturing sector, which should have added optimism, but it didn't. The euro began to decline after the publication. The fact is that the Ifo forecast model warns of a significant decline in optimism in the coming months. The services sector and the construction sector are falling markedly, and expectations are worse than a month ago. We can assume that the pullback after the spring failure is complete, and the business climate is beginning to decline again.
Significant macroeconomic data on the euro area is not expected before Christmas. Brexit negotiations on a trade agreement and news from the US, which will directly affect the entire currency market, continues to be the main drivers.
Euro's net long position declined by 2.125 billion over the reporting week. The dynamics are negative and the chances of a correctional decline in the euro increased.
The euro may correct to the support of 1.2170/80 or slightly lower to 1.2130/35. However, there is no reason for a deeper decline, since we still have a bullish trend despite some negative growth. A decline below 1.2060 will indicate the possibility of a deeper correction, so the stops are slightly below this level. The main target remains at 1.2520/50.
GBP/USD
The Brexit negotiations never broke the deadlock, as negotiators on both sides secured a goal on the fisheries issue that is financially insignificant but is politically important.
The EU is ready to give Britain the right to 25% of the fish catch, raising the offer from 18%, while Britain is demanding 60%, moving from the previously announced 80%. The parties have become somewhat closer, but they are still far from a compromise. Monday is the last day to possibly ratify the agreement this year. Thus, if this chance is missed, the parties will have to act without an agreement, which could lead to a number of legal incidents and increase tensions.
The pound's long position, which is already hardly noticed, has declined over the week. The momentum is weakening, while the possibility of a downward reversal is growing.
Today, there is still a chance that the parties will announce an agreement, but the probability of such an event is less and less. The pressure on the pound will increase later in the evening. The key support is 1.3170/90, which is still far away on the spot. Nevertheless, the pound is quite capable of passing several figures during the day, if there is a suitable occasion.
The growth is likely to continue only in one case – if there are official data on a breakthrough in the negotiations.
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