The markets sharply declined all of sudden during the US session and are now looking for reasons to continue rising after Monday's positive opening. It is not yet clear what caused the strong collapse, nevertheless, commentators lay down several versions and any of which may finally be the main one.
The first one to give signal was oil – February Brent futures began to decline yesterday at 9:00 Universal time, as soon as it became clear that the OPEC+ monitoring committee failed to make recommendations for February during its video conference meeting. Therefore, the search for a solution is passed to the ministerial level. This news coincided with the beginning of risk aversion in the currency market later that time, but European stock indices did not react to it in any way, and so it is unlikely that it provoked a sell-off.
A reassessment of the prospects for full Democratic control over the US Congress looks more appropriate. If there was a low probability of a "blue wave" scenario before the presidential elections, then on Monday, it suddenly became clear that the chances of all four candidates in Georgia are approximately equal. In addition, if both Democratic candidates go to the Senate, then with a 50:50 vote parity, Vice President Kamala Harris will have the decisive vote.
This alignment means a sharply increased likelihood of large-scale fiscal stimulus for the market. Initially, such a prospect is unenviable for the US dollar – stimulation means an increase in supply, that is, a weaker dollar and a stronger stock market. On the other hand, Inflationary expectations before the November 4 elections pulled back up after the drop last spring, which was logical and expected. But then it sharply rose, and the yield on the 5-year TIPS bonds has already reached 2%, which is the highest since October 2018.
This is a sign of rising inflation expectations in the business environment. It is possible that the December inflation data will show a strong increase, and this will mean a high probability of an earlier than currently forecast increase in Fed's interest rates.
The situation with the Senate, in turn, will be resolved the next day. Volatility may be increased, but it should be noted that if at least one Republican from Georgia passes to the Senate, then the scenario of a weak dollar will immediately become dominant again. In favor of this conclusion, the Asia-Pacific stock indices are traded mainly in the green zone on Tuesday morning, which indicates the shallow nature of yesterday's panic sales.
EUR/USD
The main currency pair remains in a strong bullish mood. The threat of reflation from the United States will grow with any development of political confrontation between Republicans and Democrats, so the US dollar will not objectively be able to start a strengthening cycle in the near future. The target price is higher than the long-term average and has a bullish trend, that is, financial flows are currently in favor of the euro.
A double top has formed in the resistance zone of 1.2300/10, which slightly increases the chances of a deeper correction. However, there are very few fundamental signs for a reversal. The main target is 1.25 and the scenario of continued growth remains dominant.
GBP/USD
British Prime Minister Boris Johnson made a special address to the nation and announced a national quarantine. This is the third lockdown since the start of the pandemic. In this case, the pound will experience additional pressure, and the positivity from signing a trade agreement with the EU will be partially offset by the threat of economic failure.
The target price remains above the long-term average. The trend is still bullish, but its strength is now in question.
The pound tried to break through the resistance zone 1.3610/20, but failed to consolidate above it. Therefore, the probability of forming a top, followed by a downward pullback has increased, but if the markets do not enter the risk flight mode, then the bulls will go on the offensive again. This is because the pound is considered to benefit from the Brexit results against the euro in the long term. In this case, the long-term target of 1.40 is still relevant.
The material has been provided by InstaForex Company - www.instaforex.com